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Inheritance and CGT property business query

Inheritance planning for property portfolio business

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I have a client who is looking to minimise iht and set his business up efficiently now. I am giving the client an idea, he is seeking advice from an expert iht but I would like help understanding the risks for myself.

he has a propert portfolio in his own name with a value of £1m, purchase price of £500k. It makes about £80k profit a year. (He and wife own a £600k home too so no iht allowances are left)

he is married with children, are the assumptions in options below accurate and are there any better options?

1. Leave business as is, pay iht at 40% on £1m.

2. Leave as is, remortgage £250k equity release and gift to kids. If he survives 7 years iht paid on £750k at 40%.

3. Sell property business to a new company owned equally by family members. DLA creates with £1m balance. Remortgage to pay off £250k of dla, then gift to kids. Then pay CT each year on profit and repay dla each year with profits. If he survives long enough to pay off DLA IHT will be due on his share of the company (ie- 1/5 of business. CGT will be payable at sale to company of 28% of the gain £500k plus stamp duty.

Is there a way to reduce his shareholding in the company once the DLA is repaid to reduce iht that will be payable on his shares, maybe other shareholders loan the company £10k each then capitalise it and dilute his shareholding?

 

I hope these options make sense but would be great to get opinions, if I’m completely wrong be gentle please!

Replies (21)

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By Matrix
06th Oct 2019 12:19

Does he need the rental income to live off? Why equity release in 2? And why would there be IHT if he survives 7 years?

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Replying to Matrix:
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By Jpbuckley8
06th Oct 2019 18:16

Yeah he does need the income to live on unfortunately.
The equity release was just a way to gift some of the value now and hopefully avoid iht on it?

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By Adam12345
06th Oct 2019 12:31

If he is willing to pay CGT on the incorporation why not just gift property(ies) directly to children (potentially avoiding SDLT and the need to remortgage).

Option 3 is the worst of both worlds - CGT and SDLT on incorporation and IHT on the shares...

They will benefit from RNRB meaning, in all likelihood, as a couple, they can leave up to £1m completely free of IHT.

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Replying to Adam12345:
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By Jpbuckley8
06th Oct 2019 18:21

Thanks, so if he were to gift the properties to their children equally, the children could create a partnership for the portfolio, pay a market rate salary for the dad who manages the day to day running of the properties,
Cgt would be due on the gift though wouldn’t it?
How would you avoid stamp duty on the transfer of property?

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Hallerud at Easter
By DJKL
06th Oct 2019 14:11

Given IHT is likely a second death issue then depending upon the ages of the couple the current values are not going to be the problem but the values some years in the future.

Accordingly the secret is likely to be to divest the future value increases that will likely (on past history) accrue to them and given the house he lives in will likely be tricky the investment properties look to be the way to go.

If it were me the first question I would ask is, "ought I combine the future interests of all the children in one beast or in various beasts", and structure my planning from that answer rather than just consider tax issues.

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By Tax Dragon
06th Oct 2019 22:21

I'm going to piggyback your OP with a related tech question.

Does your scenario 3 result in an incumbrance created by a disposition made by him?

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Jerome lane stewart and co
By Jerome Lane
07th Oct 2019 08:58

The IHT exposure will increase in line with any capital growth and could become more and more onerous. Partnerships and corporates can be structured to pass growth value to future generations. It may be worth considering a partnership and an eventual incorporation as a way of bringing other family members into the business tax efficiently and managing estate planning while still having access to income.

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Replying to Jerome_Lane:
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By Jpbuckley8
07th Oct 2019 09:58

Thanks, how would you practically do that?

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Replying to Jpbuckley8:
Jerome lane stewart and co
By Jerome Lane
07th Oct 2019 10:17

I would review the arrangements and provide tax advice on the options. These can be supported with HMRC clearances where appropriate. It's not a one size fits all answer although I'm happy to discuss if you wish.

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Replying to Jpbuckley8:
Hallerud at Easter
By DJKL
07th Oct 2019 15:56

I suspect using Growth and Freezer Shares re the corporate beast.

https://www.hwca.com/accountants-luton/share-growth-family-business-lock...

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Replying to Jpbuckley8:
Hallerud at Easter
By DJKL
07th Oct 2019 16:02

Duplicate

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By Montrose
07th Oct 2019 11:11

SDLT [on the aggregate of property values and any transferred debt] CGT[? @28%] and legal fees are going to be involved-how much will these be when compared with IHT payable at some future date - current outflow against possible future savings

If acceptable- a big if-a simple model might be for the children to incorporate a company and your client to sell the properties to that company in exchange for debt [properly documented with a redemption date].
As the rents come in, the company pays CT, and uses the net cash flow to repay the debt.
The profits will accumulate over time, so the value of the company shares in the hands of the children will steadily increase.

If control is important, have two classes of shares, voting management shares with immaterial participation in profits for parents, non voting shares with al other rights to profits to children

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By John R
07th Oct 2019 11:26

Do not overlook the use of trusts. E.g. gift £325K worth of property into discretionary trust (each). Holdover gain so no immediate CGT, no IHT (assuming no gifts in last seven years), probably no SDLT, possibly appoint property out of trust in future with another holdover relief claim. Meanwhile income can be allocated to beneficiaries with lowest tax rates (will not work re minor children). I always suggest specialist legal advice is taken when dealing with trusts.

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Replying to John R:
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By Montrose
07th Oct 2019 15:38

Holdover relief is only available per HMRC if donor spends at least 20 hours per week in running the property business- see CG65715.
Donor -if settlor - would have to be excluded from benefit both for IHT purposes[GWR] and for higher rate tax .[ITTOIA s 619 et seq.]
Not likely to satisfy what we are told client wants.

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Replying to Montrose:
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By The Dullard
07th Oct 2019 15:54

The holdover relief restriction you are referring to only applies for the purposes of s 165, not for s 260, which John R is referring to. If the client wants ALL of the income, he's better off just sitting still, the IHT can then be paid in instalments over 10 years following his demise.

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Replying to The Dullard:
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By Tax Dragon
07th Oct 2019 16:10

Agreed. Life assurance can help too.

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Replying to Montrose:
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By Tax Dragon
07th Oct 2019 16:06

TBH I'm not sure that what the donor/owner wants can be wholly satisfied.

Selling £1m of property to a start-up co that will repay its debt at say 6% per year (after tax and costs) yet having a redemption date for said debt within, presumably, a lifetime (which, given the concern, seems to be at risk of ending within 7 years)… I dunno but it seems a stretch.

Meanwhile the d/o needs £80k per year to live on but can afford £140k in CGT.

And let's look at your simple model. In order to avoid possible issues with settlement rules, the debt will need to be on commercial terms. Now, banks do lend to companies with money, though it's not always cheap to borrow. NewCo has no money but wants to borrow £1m plus enough to pay SDLT. I can imagine the banks terms would not be friendly. The model is simple; the tax not so.

And I haven't even mentioned IHT (apart from s103... which was intended only to show the OP that considerable thought is required and this isn't a back-of-the-fag-packet-Aweb-forum-discussion matter).

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By pauljohnston
09th Oct 2019 11:29

After all that dont forget that if either son or daughter divorce or have a bad time then he could loose some of his fortune. I suspect there are a number of different angles to this and if the IHT chap is any good explain fully all of these and have a number of different vehicles.

Just had a meeting with a new client who had "IHT" advice and paid for it and it is not achieving what he had hoped.

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By SteLacca
09th Oct 2019 12:15

Assuming the property portfolio is all him (i.e. not including his wife), and if he doesn't need the rental income:

Gift 50% of the portfolio to wife.

Settle the property into an IIP trust with kids as beneficiaries. Creates a CLT with tax due at 20% on £350K (£1M - 2x£325K exemption).

Survive 7 years.

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Replying to SteLacca:
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By KH
09th Oct 2019 15:08

I believe he does need the rental income, otherwise a bare trust would fit the bill perfectly.

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By Tomazaan
09th Oct 2019 17:14

In order to answer this question, we need to know a lot more information for eg the client's age, his wife's age, their general state of health, the age of the children and their maturity and family status (are they married, do they have children of their own?).
In general terms, the simpler the IHT planning, the more likely it is to succeed and not be overturned in the future. Complicated planning is vulnerable to legislative changes.
As others have alluded to, often you are swopping a current CGT/ SDLT bill against a possible IHT bill in the future.
You need to make sure that your client has enough income/ capital for the rest of their lives. In my view that is more important than giving funds to children who then might spend it or have it taken away (either by creditors or divorce).

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