We examine legislation which allows you to save money when making inheritance tax provision on properties.
It is a well-known saying that ‘inheritance tax is a tax that you choose to pay’. This is because you elect not to take any action while you are able to, meaning 40% of your taxed money makes its way to HMRC when you die.
It is important that the taxpayer takes actions at the appropriate time, including to start to plan early in life before it is too late. One size does not fit all, what can be appropriate for one may not be for others, so individual expert advice must be sought before taking any decision.
The decision rests on various elements, for example:
whether you are married
how big the properties portfolio is
how much income you require for your future financial needs
any existing health issues which may risk your life in the next seven years.
Here we discuss available legislative provisions which may be used to help you in deciding ‘what to do with the properties’ to save tax.
Spouse/civil partner exemption
If you are more likely to die before your spouse, keep hold of all the assets until death. Then you should leave your residual estate to the surviving spouse. Your surviving spouse acquires these properties at the market value; hence they can start making lifetime gifts to children without incurring any capital gain tax. Lifetime gifts work on the seven year survival clock.
If your spouse is in bad health, you can transfer your property portfolio as an outright gift to your spouse without triggering any settlement rules, capital gains, stamp duty and inheritance tax. Your spouse must leave all assets to you in the will to acquire at the market value upon death. HMRC manual TSEM4205
If your property portfolio is big enough to qualify as a ‘business’, consider incorporation relief.
TCGA92/S162 (1) refers to the transfer of a ‘business’ rather than a ‘trade’. ‘Business’ is not defined for the purposes of TCGA 1992 so the word must be given its normal meaning. It is not easy to draw the line, and each case must be judged on its own merit. In the following circumstances, relief can be available:
if the property is let on commercial terms and the activity carried out in connection with the letting is at a level typical of business, rather than a passive holding of investments. Elizabeth Moyne Ramsey v HMRC  UKUT 266
consideration is wholly or partly in shares (if partly, incorporation relief is available only on the proportion of the gain attributable to the share consideration). The assumption by the company of some or all debt outstanding, such as mortgages or loans to do with the letting business, is not taken to be cash consideration, so does not restrict the application of incorporation relief (statutory concession D32)
the business is transferred as a going concern.
Incorporation relief reduces the base cost of its shares for capital gains tax purposes with the amount of the gain relieved on incorporation, hence defers the capital gains tax liability until the company is sold. If the company shares are never sold, capital gains tax will be deferred indefinitely.
Part 3 Schedule 15 FA2003 allows the company to claim stamp duty land transaction (SDLT) exemption if the property business is transferred by the partnership. In other cases, the company may be able to claim the multiple dwelling reliefs (MDR) on the residential properties incorporation.
One of the ways of ring-fencing assets is to transfer properties to a trust up to the value of inheritance tax nil rate band (IHTNRB) for the benefit of the children.
The settlor should be able to claim the holdover relief (s260 TCGA1992) as the transfer is a ‘chargeable transfer’ within the meaning of IHTA 1984. As a married couple, they can double the amount of the settled property by making these properties joint properties before transferring them into the trust. The IHT NRB allowance is revived every seven years, so the couple is able to put extra assets in the trust later if required.
A transfer into a trust is a gratuitous gift (so there is no chargeable consideration), therefore the transaction does not attract any stamp duty.
Trusts come with an on-going implication of filing returns, ten year anniversary payment and exit charges.
Sell and invest
The rental property market is getting harder and harder due to the changes in the legislation. A typical example would be where the spouses are within the basic rate band, and selling properties each year to claim the capital gains annual exemption (2019/20- £12,000 each) with any excess at 18% CGT. Though many other issues and taxes would also impact on any decision.
For an existing business, these funds can be invested to grow the size of your business and enhance the value of your estate. Business assets are eligible for ‘business asset property relief’ from IHT charge, subject to conditions. HMRC manual guidance can be found here.