Taking real estate out of the estate

The recent attack on deductibility of interest on borrowings may put people off investing in residential properties in the future. In the meantime, however, significant wealth remains locked up in UK real estate (both residential and commercial), with property values starting to increase annually.

This growth, whilst welcome, can cause significant inheritance tax problems as the increasing value will be fully chargeable to inheritance tax on death. This problem cannot be easily solved by making a gift of the properties (or shares if the property is held in a company) due to the immediately chargeable capital gain that will arise (and no holdover reliefs will generally be available on these assets).

Corporate Strategy

For those who hold their investment properties within a company, we have devised a strategy that:

  • Facilitates a gift of significant value to reduce the chargeable estate for inheritance tax purposes;
  • Restricts the chargeable capital gain arising on these gifts to fall within the capital gains annual exemption;
  • Facilitates an income stream for fixed period of time.

This restructuring is likely to be very attractive to individuals in their 60’s or above, who would like to reduce their exposure to inheritance tax on second death but who still need an income flow to cover their day to day expenses.

The secret to this is that the value inherent in the company shares is effectively converted to an income stream, thus reducing the value of the shares over time. This income is hopefully spent, so as not to increase the individual’s estate. Although dividend rates are soon to rise, in general the inheritance tax which can be avoided is worth some potential incremental tax on dividends.

For those who hold their properties directly, we may be able to incorporate the rental business as a precursor to the above. Previous Tax Bites have pointed out the attractions of this in any event.

 

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