Attention Property Investors
We are often approached by clients, with residential property portfolios, wishing to carry out inheritance tax planning.
Many are usually considering gifting some of the properties to their children and then taking advantage of the well known 7 year rule before the value is removed from their estate.
However, there is always a ‘fly in the ointment’ known as Capital Gains Tax. When a taxpayer transfers an asset with an underlying gain to their nearest and dearest, then for tax purposes, the transaction has to take place at market value regardless of any consideration changing hands, which then gives rise to a capital gains tax charge. It is often referred to as a ‘dry tax charge’ as there is no consideration from which to pay the tax.
Sometimes therefore, it may prove best to sell the property and then gift the proceeds after the payment of the capital gains tax. The maximum capital gains tax charge is 24% on the uplift in value during ownership, whereas the inheritance tax charge is 40% on the whole value.
Ellisons can compute the underlying capital gains tax charge for you, making sure that all of the reliefs are claimed such as periods of occupancy for main residence and any improvement costs. The capital gains tax needs to be paid within 60 days via a separate CGT return, and again, Ellisons can assist you with the completion.
A very common way of avoiding the immediate payment of capital gains tax is to transfer the property into a trust. There is a specific section in tax legislation that allows a taxpayer to transfer the responsibility for paying the tax to the trustees to settle the tax on any eventual disposal where there will be proceeds to pay it. After 7 years the asset will have been removed from the estate.
As ever though, the devil is in the detail. The reason for the availability for the ‘holdover’ outlined above is because there is a possibility for an inheritance tax charge depending on circumstances.
A trust can also be used for effective income tax planning but that is beyond the scope of this article.
So, the decision whether to gift outright or into a trust can often be influenced by the underlying capital gains tax charge, and Ellisons can provide quantification of those liabilities to assist with overall tax planning advice.
