One of the key concerns of anyone with a significant property portfolio is how to avoid a large inheritance tax(IHT) charge on death.
You could simply give your properties away. But the problem with investment property is that it may well be showing a large capital gain since you purchased it. If you transferred it to your children or grandchildren although you’d avoid IHT after 7 years you could be faced with a large capital gains tax (‘CGT’) charge on the transfer.
One way to ‘have your cake and eat it’ would be to use a trust to hold the property. You can transfer properties into trust free of CGT. However, it’s important that the trust isn’t for the benefit of you, your wife or minor children, and also that it isn’t to be used as a main residence of a beneficiary under the trust.
A trust could therefore be used to arrange for a tax free transfer of investment properties to your adult children.
The trust can then transfer property to beneficiaries in the future free of CGT. You can transfer in an amount up to your nil rate band (325k) free of Inheritance Tax.
You would still need to survive for 7 years for the value transferred to be excluded from your estate. However providing you satisfy this, the property would be outside your estate and subject to the new tax regime in the trust.
The trust does not completely avoid inheritance tax. Instead it would be subject to the special regime that applies to discretionary trusts. In particular there would be a tax charge after 10 years in the trust. However, this would be much less than the rate of inheritance tax if owned personally and would be based on the growth in the value of the trust assets over the nil rate band.
The rate of tax in the trust would be in the region of 3-6%. There could therefore be a huge tax saving from using a trust to pass on investment property.
If you would like to save inheritance tax in Bristol, Cheltenham or the surrounding areas please contact us.