Understanding inheritance tax rules on buy-to-let property
HMRC has published details on the types of estate liable to inheritance tax and out of 800 cases in the Yorkshire area in 2010/2011, over a third were in York and North Yorkshire, which is indicative of where the greatest wealth lies in the county.
HMRC has also recently published details of its Inheritance Tax receipts for 2012/13 and they make interesting reading. Not only has there been an eight per cent increase over the previous year but the amount yielded is the highest since 2007/08.
The freezing of the IHT allowance (called the nil rate band) at £325,000 is having an increasing impact. This impact is likely to continue up to 2019 as the allowance will be frozen until then.
If you are a property owner, is there anything you can do to reduce your IHT?
If you own property that is let, either residential or commercial, there is an opportunity to save Inheritance Tax that can enable you to continue to enjoy some or all of the rental income.
Rental properties will not generally qualify for IHT Business Property Relief and so could suffer IHT of 40 per cent in your estate.
Inheritance tax is due on the value of your estate over the nil rate band of £325,000. Any gifts to your spouse are exempt regardless of the amount, but this can leave an IHT problem on the subsequent death of the surviving spouse.
Gifting part of the property that you do not occupy as an “undivided share” to another family member can save you IHT as long as you survive seven years from the date of the gift. If you survive for at least three years, there is still a reduction in the IHT due.
The rules allow you to receive a greater or lesser share of the rental income than your underlying capital ownership. For example, you could gift 90 per cent of the property and still enjoy 100 per cent of the rents.
There are other tax issues to consider in such planning, such as Capital Gains Tax. Because of the existing inter-spouse IHT exemption, and rules on joint rental income, this planning is not relevant for spouses.
Despite Spain’s economic problems, many UK owners of Spanish villas are sitting on a property that is still valuable.
Most UK individuals will be subject to UK IHT on their worldwide assets, and if those assets include a Spanish villa then that will potentially be subject to 40 per cent IHT too. Spain will also levy its equivalent of IHT – ISD –on the same villa, but levied on the beneficiaries of it.
Although the UK-Spain double tax treaty does not cover IHT, the UK will still give credit for Spanish death duties paid.
Generally, the incremental Spanish ISD rates result in less than the UK IHT rates. The villa cannot be moved out of Spanish ISD because of its physical location – and changes in the recent double tax treaty with Spain also mean that putting it into a special UK company won’t work.
However, if instead the asset can be moved out of your UK IHT estate and be subject only to Spanish ISD, then there is scope to save tax overall because of the lower Spanish rates. This could be done by gifting part of the property in the way described above for instance. However, depending on where and when it was bought, it could also be standing at a substantial capital gain and this may carry its own problem. A gift to a family member (other than your spouse) will be treated as if you had received the full market value and give you a tax bill if you do not plan properly.
Potentially a trust could be used as part of this planning. Spanish law does not recognise the AngloSaxon concept of trusts, and this is a complex area.
Rob Durrant-Walker is a tax consultant at Garbutt & Elliott, which has offices in York and Leeds. Rob can be contacted on 01904 464100, or by email to firstname.lastname@example.org