Some advisers claim that by taking a series of pre-planned steps, the value of shares in a property company are completely sheltered from Inheritance Tax (IHT).
When something looks too good to be true….
Unfortunately, the reality is that properties held personally, in a trust or in a company will be liable to IHT. Of course with a Labour Budget on 30 October, IHT may be increased. There is also speculation is that the capital gains tax tax-free uplift on death may also be removed, meaning there is effectively a “double death tax”. This could mean that a gain on a buy-to-let property is effectively taxed at just over 54%.
So, what can you do to protect against IHT changes? This will depend on how the properties are held.
Incorporating your property business
If there are a number of properties being run as a business you may consider incorporating the business. Incorporation Relief should be available so that there is no capital gains tax payable and the company takes over the properties at current market value. Stamp Duty Land Tax would however be payable, although this can be reduced by applying commercial rates of SDLT where six or more properties are transferred.
You can then consider gifting shares either outright or into trust to family members. This might trigger a capital gains tax charge but currently the maximum rate of CGT on shares is 20%. The value of the shares gifted will be outside your estate after 7 years.
You can also create growth shares which only participate in future growth in value over a pre-determined hurdle rate. With careful planning HMRC should accept that these shares have little value on issue.
Where properties are owned through an existing partnership, incorporation can take place without SDLT being payable.
Alternatively, you could simply “sell” the properties to your own limited company. Yes, this will create capital gains tax and SDLT liabilities but it would “bank” these at the current rates. It would be necessary to crunch the numbers to calculate what the overall effective tax rate is.
The advantage of this would be that it would create a significant director’s loan account credit. You could immediately gift some or all of this to your children. This would be a Potentially Exempt Transfer (PET) and outside your estate after 7 years. Whilst you have “given away” the loan account (or part of it) your children can only access the funds on your say so.
Forming a property partnership
Forget forming a partnership to incorporate later on. The extensive SDLT anti-avoidance rules mean that on incorporation SDLR relief will not be available.
Instead, it is possible to form a partnership with family members entitled to a future share in the growth in value of the properties. With care, this can be achieved without any tax cost and will mean that the majority of future growth in value falls outside your estate.
Direct gifts of property to your children
You can make outright gifts of property to your children. There will be no SDLT payable but there will be capital gains tax to pay on any increase in value of the property since it was acquired. Any gain would have to be reported to HMRC and the tax paid within 60 days of completion.
Using a family trust
The capital gains tax payable on direct gifts of property may make this option unattractive. As an alternative, you could consider using a trust. The transfer into the trust is a Chargeable Lifetime Transfer, so any transfer of value over £325,000 (£650,000 for a married couple) would incur a lifetime IHT charge at 20%. However, as it’s a gift into trust any capital gain can be held over, meaning that the trust effectively takes over the original base cost of the property.
At a later date the property can be transferred out of the trust to your children and again the gain can be held over. This means that the trust can act as a “stepping stone” to pass properties indirectly to the children without suffering a capital gains tax charge.
I’ll stay on me own…
You can of course opt to do nothing and see what the Budget brings. It may be that nothing changes, although this appears increasingly unlikely.
Next Steps
If you want to learn more about sheltering the value of shares in a property from IHT or maybe you are interesting in learning more about making outright gifts of property to your children then get in touch.
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