Keeping property within your family

Published by Dipesh Galaiya on 14 October 2020

Share this article

For many families, property is held as a long-term investment, whether it is used for the family business or rented to others.  For the purpose of this article property excludes the family home.

Many people like to hold property for its rental income which can be used to fund education costs for their grandchildren – a lovely legacy but one which comes with its own set of tax issues. However, if planned carefully, the tax cost of this kind bequest can indeed be minimised.

A significant inheritance tax charge can arise when property (especially in London and the South East) is passed down the generations on death. Making an outright gift of property could be an option, but that too comes with potentially large capital gains tax costs if the property is pregnant with a significant gain.

Another key problem is that of losing control over the asset – gifting to younger family members comes with the risk of assets being mis-managed and/or exhausted away.

We are often asked “I would like this property to be kept in the family but at a very low tax cost, and I don’t necessarily want to hand-over the ownership of this property.”

Careful use of trusts can offer an interesting solution to some of these issues. Trusts are managed by trustees, and there is no reason why the matriarch cannot be included as a trustee thereby giving them the much-desired control.

Trusts own assets for the benefit of their ‘beneficiaries’. The term ‘beneficiaries’ can be very wide and can include children, grandchildren and ‘remoter issue’, i.e. future generations. It can also exclude individuals such as spouses or civil partners.  With a possible life of 125 years, a trust can go on for much longer than any individual beneficiary.

Unlike making an outright gift of a property, the settlement under a trust offers the matriarch an option to defer the capital gains tax charge until such date in the future when, for example, the property is actually sold by the trust. This presents a significant cashflow saving at the outset.

If the value of the property settled under a trust is below the nil rate band (i.e. £325,000) and the matriarch survives 7 years then this settlement can fall out of their estate thereby offering an effective inheritance tax planning solution. Husband-and-wife can settle up to £650,000 (i.e. two lots of the nil rate band) of property into trust with no inheritance tax charge of 40% upon survival for 7 years. Careful consideration of any previous lifetime gifts would need to be made to ensure any of the £325,000 allowance has not previously been used.

As trust has its own tax costs. For example, an IHT charge every 10 years (at a maximum rate of 6% on the value of the trust’s assets exceeding the prevailing nil rate band) and potentially upon making capital distributions.

However, where a higher (or additional) rate taxpayer receives rental income from his property and they then fund their grandchildren’s education costs, there could be fairly substantial Income Tax savings made as ultimately an income distributions made to, or for the grandchildren’s benefit, will be taxable on them maximising the use of their personal allowances and lower rate tax bands.

This is a complex area but careful planning can help you preserve the property within the family for its long-term benefit whilst maintaining control and managing the associated tax costs.

If you would like to discuss the topics explored in this article, please do get in touch on 0330 124 1399, via our enquiry form or speak to your usual Kreston Reeves contact.

Share this article

Email Dipesh

    • yes I have read the privacy notice and am happy for Kreston Reeves to use my information

    Related people

    Email Jo

      • yes I have read the privacy notice and am happy for Kreston Reeves to use my information

      Email Karen

        • yes I have read the privacy notice and am happy for Kreston Reeves to use my information

        View teamSubscribe

        Subscribe to our newsletters

        Our complimentary newsletters and event invitations are designed to provide you with regular updates, insight and guidance.

          • Business, finance and tax issuesPersonal finance, tax, legal and wealth management issuesInternational business issuesCharity and not-for-profit issues

          • Academies and educationAgricultureFinancial servicesLife sciencesManufacturingProfessional practicesProperty and constructionTechnology

          • yes I agree I have read and accept the privacy policy and am happy for Kreston Reeves email communications I have selected above

          You can unsubscribe from our email communications at any time by emailing [email protected] or by clicking the 'unsubscribe' link found on all our email newsletters and event invitations.