Buy-to-let com­pa­nies won’t pro­tect you from in­her­i­tance tax

Yorkshire Post - Property - - PROPERTY -

com­pa­nies rarely qual­ify for Busi­ness Prop­erty Re­lief for in­her­i­tance tax (IHT) pur­poses.

That is why in­di­vid­u­als with such buy-to-lets need to con­sider al­ter­na­tives in or­der to pro­tect the as­sets from IHT.

Gen­er­ally, this will in­volve di­rect dis­pos­als of com­pany shares, but the ex­tent to which this can be done is re­stricted by cap­i­tal gains tax (CGT) con­sid­er­a­tions for di­rect gifts, and IHT con­sid­er­a­tions for gifts into trust.

This is be­cause a gift of such as­sets in your life­time di­rect to a fam­ily mem­ber is a po­ten­tially ex­empt trans­fer for IHT pur­poses and if you sur­vive the gift by seven years it is ex­empt from IHT.

How­ever, it could be li­able to CGT at a rate of 28 per cent.

If you make the gift through a trust you avoid the CGT li­a­bil­ity but you could find your­self ex­posed to an im­me­di­ate charge to IHT at the life­time rate of 20 per cent depend­ing on the amount gifted.

As an al­ter­na­tive to mak­ing di­rect gifts of the whole value of the com­pany, the cur­rent low value of prop­er­ties can be frozen for IHT pur­poses and fu­ture growth passed on to the next gen­er­a­tion, avoid­ing IHT of 40 per cent.

This can be achieved ei­ther by way of di­rect gifts or by gifts into trust where as­sets need to be “pro­tected”.

The first step is to cre­ate a sep­a­rate class of growth shares in the prop­erty in­vest­ment com­pany by way of a bonus is­sue.

These new shares will only be en­ti­tled to div­i­dends and to a cap­i­tal dis­tri­bu­tion on a wind­ing up once the cur­rent value has been dis­trib­uted to the orig­i­nal share­hold­ers.

The rights at­tach­ing to the orig­i­nal shares need to be al­tered to re­strict their fu­ture div­i­dends and wind­ing up pro­ceeds to their cur­rent value. This has the im­me­di­ate ef­fect of freez­ing their value for IHT pur­poses.

The new shares are worth very lit­tle at the out­set but will grow in value once un­der­ly­ing prop­erty val­ues in­crease.

This fu­ture growth in the shares might be due to in­creases in prop­erty val­ues gen­er­ally or might sim­ply be be­cause ex­ist­ing bor­row­ings are be­ing re­paid out of rental in­come and thus in­creas­ing the net value of the prop­erty which is then out of the donor’s es­tate for IHT pur­poses.

The new growth shares are then gifted to the next gen­er­a­tion ei­ther di­rectly or through a trust. Be­cause of their low ini­tial value this can be done with no CGT or IHT im­pli­ca­tions.

If trusts are used it could be ad­van­ta­geous, depend­ing on the value of the com­pany, to use a num­ber of trusts set up over con­sec­u­tive days to cre­ate more than one nil-rate band, as each trust is en­ti­tled to its own nil-rate band.

If five trusts are used then each has a nil-rate band of £325,000 and could there­fore po­ten­tially save a con­sid­er­able amount of IHT.

The orig­i­nal share­hold­ers must be aware that any fu­ture re­turn from the com­pany will be capped to its cur­rent value and fu­ture div­i­dends and cap­i­tal re­turns will be re­stricted and will cease once the cur­rent value has been com­pletely drawn out. There is there­fore the risk that the in­come and cap­i­tal value will cease at some point in the fu­ture.

As with most tax plan­ning op­por­tu­ni­ties it is im­por­tant to en­sure the le­gal doc­u­men­ta­tion is com­pleted cor­rectly and there­fore de­tailed pro­fes­sional ad­vice is re­quired to en­sure the ar­range­ment is fully tax­ef­fec­tive.

Robert Peel is a tax spe­cial­ist at Gar­butt & El­liott Leeds. tel: 0113 273 9600 and York, tel: 01904 464100, www.gar­butt-el­liott.co.uk

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