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Green cake house AccountingWEB IHT: Have your property cake and eat it
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IHT: Have your let property cake and eat it

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Many individual landlords are facing huge inheritance tax charges on their death. Tax specialists Forbes Dawson have a plan to mitigate some of that pain while keeping most of the rental income. 

14th Jul 2023
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Anyone who owns their own home plus one or more buy-to-let properties has a potential inheritance tax (IHT) problem, or their children do.

Where to begin

A starting point for much IHT planning is to work out how to give away assets to the next generation. Generally, if the donor survives seven years from the date of the gift, then the value of that gift will be outside the scope of inheritance tax.

However, capital gains tax (CGT) will be a big factor in any IHT planning which involves gifting valuable assets such as a property, because CGT generally is due on the assumed market value of the gifted asset.

Give away the home

On the facts above, it may seem like a great idea for parents to gift their family home to their children and continue to live in it. There would be no CGT on a disposal of the main home if it has been occupied as the main home for the whole of the ownership period. Then, as long as the parents survived seven years, there would be no inheritance tax charge either.

Unfortunately, this simple plan doesn’t work as the gift with reservation of benefit (GWROB) rules treats an asset as remaining in a person’s estate when that person retains a significant benefit from the asset, such as living in a house that they have given away. However, a similar plan using a let property can work, if the conditions are right.

Investment property example

Sarah is a divorcee aged 60 with two adult children. She lives by herself in a house worth £800,000 and owns two let properties: L1 and L2 which are each worth £250,000. Her total estate is worth around £1.5m, including other investments, and she wants to pass it on to her children with minimum IHT payable.

Property L1 has been held for over 15 years and would generate a capital gain of £150,000 if sold. Property L2 is let as holiday accommodation and was acquired less than two years ago. 

Sarah is keen to undertake some IHT planning but she cannot give away property L1 because she can’t afford pay the CGT which would arise, and she relies on the income from that property to live off. Property L2 would only generate a small gain if sold or given away.

She is advised to give 99% of property L2 to her two children and agree with them that she will continue to enjoy all of the income from the properties. The plan is that the value of 99% of the property will be outside her IHT estate after seven years and yet she will still have the security of the income stream, which she will continue to be taxed on.

This works because the GWROB rules have a useful exception in FA 1986 s 102B (3) which relates to ‘buy to let’ properties. This legislation allows for a gift of an undivided (meaning not joint) share (meaning not the whole thing) of a rental property where the donor retains 100% of the rental income produced by the gifted property.

Joint owners of a property who are not spouses or civil partners can generally allocate the income of the property between them in whatever proportions they wish. This means that Sarah and her children can agree to share the income from property L2, such that she gets 100% of the rental income, but 99% of the asset has passed down a generation.  

Forbes Dawson view

This is clearly a useful IHT planning opportunity in the right circumstances. However, attention must always be given to the amount of potential gain attached to a property.

For long-held properties it will come down to a trade-off between paying CGT at 28% now to save IHT at 40% in the future. But remember that CGT is only paid on the gain but the IHT would be due on the total value. Add into this mix the political risk that CGT rates could rise after the next general election.

Cash solution

Where there is cash available to pass on to the next generation, a variation on this plan could work as follows:  

The adult children are given cash to allow them to purchase a 99% share in an investment property along with the parent who would acquire a 1% share.

This transaction would introduce the question of whether a pre-owned asset charge (POAT) applies. POAT applies annually as an income tax charge where an asset has been successfully moved from an estate and yet is still enjoyed by the donor. It is clear that the POAT legislation requires there to be occupation of any property by the person who has gifted the cash, and so it should not be a problem here.

The GWROB legislation should also not apply in the case of cash used to acquire an investment property.

Replies (30)

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By Justin Bryant
14th Jul 2023 12:12

All good, sensible stuff in my view, but I wonder what DN thinks about all this blatant IHT avoidance for greedy, rich BTL cleints (he was praising FD the other day I recall for previously calling out (like I did but with no similar praise) that dodgy GDPR provision scheme)?

Maybe he'll now be reporting FD to its regulators under PCRT rules etc. with another BBC Newsnight self-promoting special etc.

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Replying to Justin Bryant:
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By hiu612
17th Jul 2023 09:47

I've always been cautious about the GROB share of property 'get out'. I know tax and logic don't often align, but conceptually it just doesn't make sense. Give away 100% and keep any income and you're knackered. Give away 99% and keep all the income and you're golden. That can't have been the intention of the rules. And when you measure it against the somewhat pious outrage at e.g. the school fees thing, how different is this really? In DN's language, you pretend someone else owns it but carry on deriving the benefit of it. I realise that the technical analysis is sound. And I realise that it has been around long enough that if HMRC didn't like it they've had plenty of opportunity to attack it. But still, the client's who I've seen implement it are told that it doesn't feel within the spirit of the rules and so they ought to do it with an acceptance that it could be challenged by virtue of change in HMRC guidance/policy and without any underlying change to the rules. A bit like the double trust/home loan stuff.

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Replying to hiu612:
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By Justin Bryant
18th Jul 2023 09:06

To avoid any potential argument with HMRC here, I would usually limit it to 90%, but otherwise it's all fine and vanilla per my above comment (but I'm sure DN hates it all the same).

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By Hugo Fair
14th Jul 2023 15:10

This all (and I speak as a non-expert in these matters) looks 'viable' ... but with a strong odour of dodginess wafting from every corner - in practical as well as taxation matters.

"She is advised to give 99% of property L2 to her two children and agree with them that she will continue to enjoy all of the income from the properties"
... so who will be paying the costs (maintenance etc)? Who will tenants chase for repairs? etc

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Replying to Hugo Fair:
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By Justin Bryant
14th Jul 2023 15:44

It's not dodgy at all, unless perhaps you're DN per my above tongue in cheek comments.

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Replying to Justin Bryant:
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By Hugo Fair
14th Jul 2023 17:10

I've no problem in being mistaken for anyone else (which is likely to be to their detriment), but I couldn't look (or sound) less like DN if I was a robot. :=)

Nevertheless, per my previous post and the suggested scheme ...
Who will be paying the costs (maintenance etc)? Who will tenants chase for repairs? etc
I really am interested ...

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Replying to Hugo Fair:
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By Justin Bryant
17th Jul 2023 08:58

I meant "you're" in the sense that unless you're Boris Johnson, honesty is usually the best policy i.e. I'm not saying you're DN (or BJ).

Incidentally, the best current IHT planning is simply to stay alive long enough for this potential change.

https://www.theguardian.com/politics/2023/jul/15/no-10-reportedly-in-tal...

Imagine how annoyed you'd be if you had a huge IHT estate and died a day before such a change (life support machines would be in big demand presumably)!

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Replying to Justin Bryant:
By Ruddles
17th Jul 2023 09:24

Justin Bryant wrote:
Imagine how annoyed you'd be if you had a huge IHT estate and died a day before such a change (life support machines would be in big demand presumably)!

I don't imagine that I'd be annoyed at all. My inheritors on the other hand ...

And on the flipside, imagine how annoying it would be if someone with a modest estate were to die a day after the change thus losing the benefit of CGT-free uplifts (which I assume would be a consequence of such a change). "Turn off the life support now"

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Replying to Justin Bryant:
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By Hugo Fair
17th Jul 2023 11:16

Ta for the gossip ... I've suggested to my children that they invest in manufacturers of life-support equipment (sort of hedging their bets).

Mind you, I'm not sure of the legal definition of death (specific to IHT) ... but I don't fancy an indefinite 'life' (as per those b&w B-movies of the '50s) where my mortal remains are simply a brain (in some sort of brine within a bell jar) hooked-up to the mains and balefully still reactive to stimuli but unable to communicate my unprintable thoughts!

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Replying to Justin Bryant:
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By Latinaid
17th Jul 2023 13:28

Justin Bryant wrote:

I meant "you're" in the sense that unless you're Boris Johnson, honesty is usually the best policy i.e. I'm not saying you're DN (or BJ).

Incidentally, the best current IHT planning is simply to stay alive long enough for this potential change.

https://www.theguardian.com/politics/2023/jul/15/no-10-reportedly-in-tal...

Imagine how annoyed you'd be if you had a huge IHT estate and died a day before such a change (life support machines would be in big demand presumably)!

I wouldn't worry - this is a suggestion for the Tory manifesto for the next GE. Not even this blatant vote-buying move is likely to save them.

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By Ian McTernan CTA
14th Jul 2023 16:53

The real problem is CGT - and almost no one fits into the above scenario with a recently bought property that happens to be FHL with small gain.

Usually by the time you can persuade (new) clients to look seriously at this issue they have multiple properties that have been owned for many years, large CGT gains on all of them and remortgaged to way above the original purchase price.

It then becomes a long exercise in review, calculations, etc to sort it all out and move something into cash or make other plans.

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Replying to Ian McTernan CTA:
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By Justin Bryant
14th Jul 2023 17:11

Agreed. There's a better potential solution from me here: https://www.accountingweb.co.uk/tax/personal-tax/a-taxing-conundrum-how-...

Or just a (possibly deathbed marriage) IPDI with wide powers of appointment.

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Replying to Justin Bryant:
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By Justin Bryant
18th Aug 2023 10:41

I note that my above solution has been approved here: https://www.taxinsider.co.uk/a-family-affair-passing-down-the-property-p...

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By Moo
17th Jul 2023 09:31

'Anyone who owns their own home plus one or more buy-to-let properties has a potential inheritance tax (IHT) problem, or their children do.'

I stopped reading after first sentence.
Surely anyone with a home worth more than £500K or £1million for a couple has a potential IHT problem?? and that's without taking other assets and potentially exempt lifetime transfers into account.

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Replying to Moo:
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By Hugo Fair
17th Jul 2023 11:00

What the author meant (presumably) was that those were the pre-conditions for his (not very novel) scheme to be relevant ... so, I guess it worked if it 'qualified you out' (in terms of piquing or not your interest)! :=)

You are however of course correct ... it's just that it's harder for your estate to escape IHT if you have a single property (of sufficient value) in which you reside - and your spouse has pre-deceased you.

Another example (of which there are almost infinite varieties) where it is easier to save tax if you have more wealth than you know what to do with it, than if you cannot afford to pay the tax whilst also putting food on the table.

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Replying to Hugo Fair:
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By Moo
17th Jul 2023 14:18

What would pique my interest would be a move towards something like the Irish system of Capital Acquisitions Tax where gifts and inheritances over a threshold are taxed on the recipient rather than the giver.
Labour want a redistribution of wealth as does much of the population, especially the young. This would surely be a way of spreading the pots of money accumulated by the boomers more widely and further down the generations.

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Replying to Moo:
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By Arcadia
17th Jul 2023 19:04

There is no evidence at all that Labour want a redistribution of wealth. All Starmer's recent pronouncements confirm that Labour will retain exactly the same disastrous economic and taxation policies that we have suffered under for the last 13 years.

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Replying to Arcadia:
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By Moo
20th Jul 2023 11:57

I think Starmer and Reeves are desperate not to frighten wavering tory-ish voters.
What they may not appreciate fully is that many of my boomer generation might actually appreciate more IHT incentives to spread our savings more widely around the family when we go.
I'm sure that if you dig more deeply into Labour MPs and party members most will say they favour redistribution of wealth, whether it is done by wealth taxes on the mega rich or by increasing tax free allowances at the other end of the scale is moot.

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By Tom 7000
17th Jul 2023 09:57

Pay CGT now to skip IHT later , but make sure you live for 7 years or you pay both,,, is that the succinct answer from reading this?

Just checking

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By Joe Soap
17th Jul 2023 10:16

"Anyone who owns their own home plus one or more buy-to-let properties has a potential inheritance tax (IHT) problem, or their children do."

Let us be clear there is a potential IHT liability, not a potential IHT problem.

We live in a country where public services are hugely underfunded - that is where there is a problem.

But as Mr Justice Somebody said in 1890 (or so) we do not have to arrange our affairs to allow the tax man (there would have been no tax women in 1890) to take the largest amount of tax from us. Or something along those lines.

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Replying to Joe Soap:
7om
By Tom 7000
17th Jul 2023 10:57

Under funded or overspent and a lot of wastage?
How much tax is fair. I invoice £120 - I have £45 to go shopping with 60% plus tax... how is that fair

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Replying to Joe Soap:
JD Portrait
By John Downes
17th Jul 2023 13:19

We live in a country where the bloated public services are hugely greater than the tax base can support.

There, fixed it for you.

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Replying to John Downes:
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By Andy Reeves
17th Jul 2023 15:22

Norway!

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Replying to John Downes:
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By Arcadia
17th Jul 2023 19:07

Taxes don't pay for services, the country's income does that. The proportion of income kept by the wealthy in non-productive financial assets and residential property, artificially kept high by the Tories for electoral purposes, are what are dragging down our economy. The public services are hollowed out, not bloated.

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By abacus70
17th Jul 2023 10:20

Does this assume that the properties have no mortgage?

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Replying to abacus70:
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By Tom 7000
17th Jul 2023 10:54

Does it matter if they have them or not?

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Replying to Tom 7000:
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By BryanS1958
17th Jul 2023 14:50

Yes, mortgages can consideration for SDLT purposes.

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By Gulzari Babber
17th Jul 2023 11:15

My wife and I are retired and we transferred one half our BTL properties to our three boys and paid the CGT due at the time. Our arrangements with the boys work very well as both of us are able to retain enough rental income for our daily use. All of us make our tax returns and my wife and I declare the rental income.
To answer a previous question as to who is responsible for the maintenance the Managing agents have been informed so have the tenants that the situation will be as before and that we will continue to ensure the properties are maintained and repaired as and when required.
There is nothing dodgy in the recommendations suggested by
We hope we can survive 7 years and the boys do not have to pay any IHT

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By Postingcomments
17th Jul 2023 15:16

I've always been a bit sceptical of this "get out". It sounds great, but will it work in practice?

Couldn't HMRC simply argue that your estate hasn't really reduced in value that much if you have retained the right to the rental income?

I'm surprised to see a firm come out so strongly in favour of it. I'm guessing they have thought this through a bit deeper than I have.

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By moneymanager
18th Jul 2023 17:20

The likes of Generation Rent should be called upon, while they bang the drum fir supposed "renter's rights", they might look to Germany where renting is commonplace and landlords have generous cgt right offs and hit exemption, rather akin to agricultural relief.

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