Un­der­stand­ing in­her­i­tance tax rules on buy-to-let prop­erty

Yorkshire Post - Property - - PROPERTY - Rob Dur­rant-Walker

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?

Let prop­erty

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.

Span­ish prop­erty

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 rd­walker@gar­butt-el­liott.co.uk

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