IHT and succession planning for property

With property values over the past decade increasing, and the Inheritance Tax (IHT) tax-free allowance (Nil Rate Band) being frozen, those with property portfolios are more exposed to significant liabilities.

The IHT nil rate band has been frozen at £325,000 since 2009 and is set to remain so until at least 2028. Although the more recent introduction of an additional residence nil rate band (also frozen until at least 2028) of £175,000 helps for those who qualify, these figures have not kept pace with property values.

Those with property portfolios are even more exposed to significant liabilities, however steps can be taken to plan for the tax payment and to mitigate that potential large liability.

This article accompanies our latest Crowe Cast on the issue.

Will planning

It is important to have an up to date will. If the goal is to pass wealth down to future generations (your children or grandchildren) on death, this will be subject to IHT at 40%, subject to the main and residence IHT nil rate bands.

If you decide to leave your estate to your spouse or civil partner, on the second death, i.e, the death of your spouse, any unused nil rate band from the first death’s estate can be utilised, which can lead to a potential combined nil rate band of £1 million. However, the residence nil rate band can only be used against a property that has been used as a residence during the period of ownership.

There are Capital Gains Tax (CGT) benefits of leaving assets to beneficiaries on death, as there is a CGT uplift at death. This means the beneficiary will inherit the asset at probate value, which effectively wipes out any historical capital gains.

Gifts during lifetime

To reduce the size of your estate before death, you can gift property to your potential beneficiaries during your lifetime. Such gifts can usually be transferred free of IHT provided you survive more than seven years from the date of gift. There are also reductions in the value taxed on your estate after three years.

The position is complicated if you still live in or use the property in question after you have gifted it. However, with careful planning, there are steps you can take to make gifting an effective means to reduce your estate. The position is simpler where the property is a rental property and you decide you want to gift it, and hence the rental income, to the beneficiary.

There are taxes to consider on gifting property, which include CGT on the gain arising between acquisition and the date of gift, in addition to Stamp Duty Land Tax (SDLT) which may be payable if there is a mortgage on the property. However, with careful management of liabilities, gifts may still prove more tax efficient in the long run.

Other tax planning ideas

There are other alternative structures for holding property, and other examples of types of structures we see and advise are jointly held property, partnerships, discretionary trusts and family investment companies.

There are a number of ways you can structure or gift your property portfolio in order to mitigate the IHT liability on your estate at death. It is important to do this sooner rather than later, as early planning can lead to sizeable reductions in the liability.

If you have any questions about the topics raised in this article or to discuss your individual circumstances, please get in touch with Nick Latimer, David Conway, Polly Dowdell or your usual Crowe contact.