Inheritance tax and legacy planning for property company owners
As the value of the rental properties within your property company increase, so does the value of your shares and hence the value of your personal estate for inheritance tax purposes.
You may have considered gifting shares, but that could have CGT implications and what if the person you make the gift to then gets divorced or becomes insolvent?
The solution to this problem is to create a new class of shares with minimal initial value and no automatic voting or dividend rights, then to gift these shares to a discretionary trust, for the benefit of your loved ones and their bloodline only. The company then changes its rules so that all future growth accrues to the new class of shares, outside of your estate.
A formal ‘letter of wishes’, provides rules for trustees of the discretionary trust to follow. This is drafted in such a way so as to ensure that only your nominated beneficiaries and their bloodline can benefit from the trust. Also, and very importantly, the value of the trust is only ever distributed in the form of loans to beneficiaries, repayable on their death. These loans, whilst they are outstanding, also accrue interest at 2% per annum so that the value of assets keeps pace with the Bank of England annual inflation targets.
A practical example
One of your beneficiaries gets married and wants to buy a house. The trustees agree to make a loan of say £500,000 to help with this. Your beneficiary and spouse then have children. However, after a few years the couple decide to get divorced. The spouse wants half of the value of the house, which the Courts may well agree should be the case, but the debt to the trust, plus accrued interest, needs to be factored into the settlement figure.
Years later the beneficiary dies and his/her assets are valued for probate purposes. Yet again, the debt to the trust needs to be factored into the net value of the estate, not forgetting the accrued interest of course. This serves as financial salvation to their bloodline!
Tax on trusts
The structure above does not avoid IHT completely. The A shares will still be subjected to IHT when you pass away, but at least that exposure to IHT will be frozen at the point of implementation of this planning. Also, the trust itself also has a tax charge of 6% to pay every 10 years.
This is based on the value of the assets in the trust, i.e. the B shares and any loans and interest due to it. You would have to live for 70+ years for the 6% tax on the trust to be anywhere near being close to what you would otherwise pay in IHT. Also remember, the IHT is payable on the net value of the estate at the time of death, but the trust only pay 6% every 10th anniversary based on the value of the trust at that time.
On this basis, it could be 100+ years before the tax on the trust is greater than the inheritance would otherwise have been. Furthermore, you also have to factor in that most people do not live to be 100 years old, and in that period your legacy could have been subjected to inheritance tax two or more times. Most importantly, your legacy is protected so that it only benefits your chosen beneficiaries and their bloodline.
There will never be an optimal ‘one-size-fits-all’ business structure for tax purposes. Property118 Limited (in association with Cotswold Barristers) can provide professional advice from a qualified Barrister-At-Law, insured up to £2,500,000 per claim.
Visit Property118 for more details and to view a presentation with a useful overview of some of the other options you should consider. Your can also book a Tax Planing Consultation with them and start saving today.