Let property and inheritance tax planning
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Inheritance tax (IHT) can be minimised with some advance planning, but you need to look at the value of all your assets, not just your property portfolio.
If you pass on assets to your heirs at least seven years before you die, those assets will no longer be counted as part of your estate at death and thus escape IHT. However by gifting your let properties you will be divesting yourself of the rental income which you may need to live on. In addition the gift of property is treated as a sale at open market value even if no money changes hands. This could therefore, result in a substantial capital gains liability
The dilemma is that if you hold the property when you die, you heirs will inherit the property at its current market value at the date of death and the increase in the properties value will escape capital gains tax. However the value of the property at that date will be subject to inheritance tax at 40%. If you give away the property, then die within seven years, the latent gain will be subject to capital gains tax at a potential rate of 40% and the full value of the property will also be subject to IHT. Insurance products are available to protect against the IHT due if you die within seven years of the gift.
Gifts between spouses or registered civil partners do not attract capital gains tax, as long as blatant tax avoidance isn’t involved. So a good plan is to give properties to your spouse so you each hold assets of approximately equal value. When the first of the two dies, tax free gifts from the decease’s estate of up to the nil rate band (currently £300,000) can be made to whoever he or she wishes, and the balance of the estate is left tax free to the spouse. This plan does not work is the spouse does not have a UK domicile, as there is a cap on the tax free amount they can receive of £55,000. Be prudent and ensure that you have a tax efficient will in place and this is reviewed regularly.
If you hold any jointly owned property as tenants in common, rather than as joint tenants, it is far easier to give away a share in that property. So consider changing your ownership to tenants in common.
The value of property considered for inheritance tax is the market value net of any debt secured on that property. If your property portfolio is funded by borrowings, you should consider the mortgages being secured on those properties and not on you own home, or on other commercial let properties that may qualify for some other IHT relief. Beware of increasing total debt on your let properties as the interest paid additional borrowings may not all qualify for tax relief against your rental income.
If you let property as furnished holiday lettings the value of that property can be exempt from IHT when you die. You will need to be actively involved your holiday lettings business, not just appoint an agent to do everything, and there are certain letting conditions that need to be met before the holiday lettings criteria is met.
Jason Sharp
Taxation Solutions Limited
www.propertytaxation.co.uk
Tel: 0800 027 4533
This information sheet is designed to be a general guide only and no liability is accepted by Taxation Solutions Limited for any loss occasioned in reliance on the information given therein.
About the Author
Taxation Solutions Ltd
Edwinstowe House
Edwinstowe
Nottinghamshire
NG21 9PR
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