De­cline in prop­erty val­ues presents in­her­i­tance tax op­por­tu­ni­ties

Yorkshire Post - Property - - PROPERTY - Robert Peel

THE eco­nomic cli­mate con­tin­ues to paint a pretty de­press­ing pic­ture for prop­erty prices and statis­tics pub­lished by the Na­tion­wide sug­gest that a prop­erty in the York­shire re­gion which had a value of £300,000 only two years ago has now dropped in value by about 10 per cent down to £270,000.

While any fall in the value of prop­erty is a cause for con­cern, this does present a unique op­por­tu­nity for In­her­i­tance Tax plan­ning, in that over the same two-year pe­riod the in­her­i­tance tax thresh­old has in­creased from £312,000 to £325,000.

If you have a sec­ond home, this might be an ideal moment to con­sider get­ting it out of your es­tate for in­her­i­tance tax pur­poses and re­duc­ing your ex­po­sure to tax. This could be a hol­i­day home or an in­vest­ment prop­erty from which you en­joy a rental in­come.

There are op­por­tu­ni­ties for mak­ing a gift down to the next gen­er­a­tion while val­ues are de­pressed and al­lowances re­main rel­a­tively high. You can make a di­rect gift to your chil­dren, but be­ware of cap­i­tal gains tax that might arise, par­tic­u­larly bear­ing in mind that the rate of cap­i­tal gains tax is likely to in­crease in the forth­com­ing emer­gency Bud­get.

If cap­i­tal gains tax is still an is­sue then con­sider mak­ing gifts through a trust, as cap­i­tal gains tax can be de­ferred on a gift into trust. Trusts have for a long time been used to ad­dress prob­lems in two main ar­eas: tax­a­tion and do­mes­tic mat­ters.

Any gift into trust is a charge­able event for in­her­i­tance tax pur­poses and there­fore if the prop­erty is worth more than the present nil-rate band £325,000 the ex­cess would at­tract in­her­i­tance tax at the present life­time rate of 20 per cent. This would be in ad­di­tion to the cap­i­tal gains tax. A cou­ple mak­ing a gift of jointly-owned prop­erty would each have their own nil rate band and could there­fore jointly gift a prop­erty with a value of up to £650,000 free of in­her­i­tance tax pro­vid­ing that they have not made any other charge­able gifts within the last seven years.

Do you want to get the prop­erty out of your es­tate for tax pur­poses but want to be able to carry on en­joy­ing the ben­e­fit of the prop­erty? This could mean be­ing able to carry on us­ing the prop­erty for an­nual hol­i­days or to carry on re­ceiv­ing the rental in­come. Thanks to the past ef­forts of Gor­don Brown you can no longer give away as­sets and carry on en­joy­ing them and thus avoid pay­ing In­her­i­tance Tax on the value of the as­set gifted. If you give away an as­set but con­tinue to use it or re­ceive the rental in­come it is not ef­fec­tive for In­her­i­tance Tax pur­poses and tax will still be payable as if it still forms part of your es­tate.

Even if you do man­age to avoid this trap there is an In­come Tax trap wait­ing as leg­is­la­tion has been brought in which states that if you dis­pose of an as­set and it is ef­fec­tive for In­her­i­tance Tax pur­poses but you wish to carry on en­joy­ing the as­set you will be sub­ject to an in­come tax charge, sim­i­lar to a ben­e­fit in kind charge, based on 4.75 per cent of the value of the as­set gifted away. You can avoid this in­come tax charge by ei­ther ac­cept­ing that the as­set is sub­ject to In­her­i­tance Tax or you can pay a full mar­ket rent for the use of the prop­erty.

De­spite all these changes in leg­is­la­tion, there are, un­der cer­tain cir­cum­stances, still steps that you could con­sider par­tic­u­larly if you are mar­ried with adult chil­dren.

If you own a prop­erty ab­so­lutely, you could con­sider sell­ing it to your spouse at full mar­ket value. Your spouse does not have the cash to buy the prop­erty out­right so the pro­ceeds are left out­stand­ing on loan. As the new owner of the prop­erty your spouse is per­fectly en­ti­tled to oc­cupy the house and can, of course, al­low hus­band or wife to join them on fam­ily hol­i­days. You, as the pre­vi­ous owner no longer have the house in your es­tate but in its place have an out­stand­ing loan from your spouse. The terms of the loan are that it is in­ter­est-free and re­payable on death. You could then de­cide that you wish to make a gift of the loan to your chil­dren or grand­chil­dren so that in due course the loan is re­paid to them and not to you. Pro­vid­ing that you sur­vive for seven years, the value of the loan is out­side of your es­tate and you can still en­joy the use of the prop­erty. If it is a rental prop­erty your spouse can still ben­e­fit from the rents. The Pre-owned As­set Tax in­come tax charge is avoided.

No cap­i­tal gains tax is payable on the sale of the prop­erty to your spouse as trans­fers be­tween spouses are ex­empt for cap­i­tal gains tax pur­poses. The only down­side is that as it is a sale of the prop­erty rather than a gift, Stamp Duty Land Tax will be payable, but even at three per cent on prop­er­ties val­ued be­tween £250,000 and £500,000 this is bet­ter in the long run than 40 per cent in In­her­i­tance Tax.

This method of re­duc­ing ex­po­sure to In­her­i­tance Tax does not just ap­ply to sec­ond homes but can be ap­plied to other as­sets such as stocks and shares. It can also work if the prop­erty is owned jointly, when one spouse can sell their half share to the other but it does not work for both spouses.

As with most tax plan­ning ar­range­ments it is very im­por­tant to en­sure that the pa­per­work is com­pleted cor­rectly and get­ting the doc­u­men­ta­tion right for the loan is cru­cial. Pro­fes­sional ad­vice is very im­por­tant to en­sure that the ar­range­ment is tax ef­fec­tive.

Robert Peel is se­nior tax con­sul­tant at Gar­butt & El­liott who have of­fices in Leeds (tele­phone 0113 273 9600) and York (01904 464100). Robert can be con­tacted at the Leeds of­fice, or by email to rpeel@gar­but­tel­

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