If you’ve worked hard at setting up a successful property investment business over the last decade or so, then the last thing you’ll want is for a huge chunk of it to go to HMRC in the event of your death.
Certainly, you’ll want to pass on your property investments to your offspring or other close family, but if you’ve amassed equity worth more than the current £325,000 threshold, then they in turn will have to hand-over 40 per cent of it to the tax man in Inheritance Tax. In other words, they may have to sell the properties just to be able to pay the Inheritance Tax in the first place. And what if it’s not a good time to sell? It’ll seem as if all your hard work over the years hasn’t really been worth it (not that you’ll know of course, having passed over at this point).
It’s all really quite galling when you consider you’ve already paid taxes on your profits all your life. So, is there anything you can do about it? Well, yes there is – you can plan for your relatives not to pay anything like 40 per cent inheritance tax. And here’s how:
Put your property in to a Trust
A Trust is where a third party looks after your assets for the good of the eventual beneficiary. This is similar to a Will, where the assets can continue to make money i.e. if these properties are buy to let investments then rental income can accumulate. By the same token, the buy to let properties can also be sold if they are deemed to be loss-making or the equity is needed for something else. In other words, Trusts are flexible.
But Trusts are also tax efficient. That’s because by making a gift of these buy to let properties, there is no Capital Gains Tax (CGT) to pay. The CGT rate is currently either 18 or 28 per cent (depending on which tax band the recipient is in) of the amount of equity in the property.
A Discretionary Trust for instance, can allow controlled ‘chunks’ of money to be paid over time, rather than in one big lump sum. And, by applying for Holdover Relief there is no CGT to be paid until the property is sold (and at its original price, rather than market value).
But what about Inheritance Tax (which we were originally focused on)? Well, you can benefit here too with a Discretionary Trust. That’s because you don’t actually need to identify the beneficiaries at the start. You could just say something like ‘my children, grandchildren, nieces, nephews’ etc. This means it could cover a number of generations, even unborn great-grandchildren. The trustees have the discretion to pass on the wealth to future generations if the current generation is already wealthy, and would be due to pay the 40 per cent inheritance tax.
Of course, tax in the UK is a complicated subject and it’s always best to speak to a professional tax advisor before jumping in and making a Discretionary Will. If you’re a property investor and/or landlord, it’s definitely something to consider though.