IHT planning for your property

Property is often one of the most valuable assets an individual will own. Whether it is your main residence, a piece of land, an investment property or a holiday home, tax planning with the property can be costly and complicated.

In order for a gift to be effective for Inheritance Tax purposes, it has to be made unconditionally. Reserving any benefit from the asset, whether income or enjoyment can mean that the value of the asset falls back into your estate when considering your Inheritance Tax position.

It is often therefore advised that tax planning with your main home is left alone. However, there are some options potentially available to you should you have sufficient income to pay rent, for example.

Where property prices are expected to rise, then it is often beneficial to consider gifting these types of assets sooner rather than later. Even if you were to die within 7 years of making the gift, as the value of the gift for tax purposes is calculated based on the date of the transfer, any uplift in value will automatically be excluded from your estate.

Properties in popular areas, for example, UK holiday hotspots, or land which has the potential to be developed on are good assets to think about passing to the next generation. Providing you are not relying on the income or capital value during your lifetime.

Where you have held the property for a long time then it is possible that there is a substantial gain attached to the property. Gifting it outright may therefore trigger a Capital Gains Tax liability. For residential property this can be at a tax rate of 28%.  Transferring a property into a trust for the benefit of the family can defer any Capital Gains Tax liability due. This means that not only do you create a structure that allows the asset to be protected within the family for multiple generations it also allows you to transfer value with minimal immediate tax costs.

When considering trusts; care needs to be taken as to the level of value being transferred as should you transfer more than £325,000 into any trust in a cumulative period of 7 years then an immediate Inheritance Tax charge could arise.

The final thought around the transfer of property is Stamp Duty Land Tax. Where the asset is being transferred without a mortgage and for no consideration from the recipient then no SDLT would be payable. However, should the property be encumbered an SDLT cost may arise.

Ultimately transferring property as part of any Inheritance Tax planning exercise can often be very valuable long term. However, without the right advice, it can be very costly.

If you would like to discuss this further with us, then please get in touch