I HAVE BUILT UP A PROPERTY PORTFOLIO AND I’M WORRIED ABOUT INHERITANCE TAX ‘IHT’, SHOULD I GIFT PROPERTIES TO MY ADULT CHILDREN?
I have come across this same question from numerous clients over the last 20 years and being a tax advisor it is not natural to say to clients that tax is not the most important factor they should be considering.
Important factors I ask clients to consider in the first instance are:-
A. Does the income from the properties fund your current lifestyle?
B. Does the income from the properties feature in your plan to fund your retirement?
C. If you were to gift the properties to your children, are you prepared to never be able to benefit from the income or capital value of the properties again?
D. If you were to gift the properties to your children they become both the legal and beneficial owner, how do you intend to protect the family wealth in the event that your children were to squander the wealth or get divorced?
1.1 Many clients have said I’m prepared to give the properties to my children, they will look after me, they will continue to give me the income earned from the property so long as I need it. This in the world of IHT is known as a gift with reservation of benefit, HMRC will still treat you as owning the property for IHT until such time as you cease to benefit from it.
The situation gets worse because the gift gives rise to an immediate charge to capital gains tax ‘CGT’ based on the open market value of the property, so the donor could find themselves paying on the gift and then the estate would also pay IHT on the value of the property that had been gifted.
1.2 If you require the income from the properties to fund your lifestyle, my view is that you should not enter into a transaction that will prejudice your own financial security and leave you reliant upon the goodwill of others, even if they are your children.
1.3 Where the donors are a couple (not necessarily married) we have been advising clients of a discretionary trust structure which allows for £650k worth of assets to be donated to a discretionary trust in which the spouse/partner can benefit as well as the children, grandchildren etc.
The gift to discretionary trusts up to £650k if structured correctly does not give rise to a charge to CGT nor IHT and after seven years the value of the donors’ estate for IHT purposes is reduced by £650k, saving the family £260k in IHT.
The spouse/partner of the donor can continue to benefit from the income generated by the property and the assets are owned/controlled by the trustees of the discretionary trust which can be the donors.
The assets are not transferred to the children therefore in most circumstances in the event of the children divorcing the trust will not form part of the marital estate, therefore protecting the family wealth for generations.
All of this can be repeated in seven years’ time if the rules remain as they are.
1.4 As an alternative we have suggested to clients that they consider something less common to help facilitating the passing of wealth down the generations. We have been suggesting to clients that they consider the extent of their estate’s exposure to IHT and suggest to their children that they obtain a second death life policy with the parents being the insured. The children pay the premiums so as to not diminish the disposal income of the parents.
When the second parent dies, the estate is liable for IHT but at this time the policy pays out and the pay out goes toward the IHT bill.
1.5 Another structure that may be worth considering is a Family Investment Company ‘FIC’. Companies are structured in a manner in which the controllers of the company i.e. the directors can be distinct from the shareholders.
A FIC can own the parents’ investments assets, these will be controlled by the parents being the directors of the company. The shareholders of the company can include the parents which would own the voting shares but the children could be gifted some shares in the FIC relating to the value of future growth. Therefore say for example, the assets are worth £1m at the time they are transferred to the FIC, any future growth would accumulate to the shares owned by the children.
It would be possible to also couple the FIC structure with the discretionary trust structure in order to reduce the value of the estate of the parents while still retaining control of the assets.
An important consideration is how to transfer the properties to the FIC, ordinarily a transfer of property to a limited company gives rise to a charge to CGT and SDLT but there are ways in which such charges can be mitigated.
FIC’s currently benefit from not being subject to mortgage interest restrictions therefore these types of structures will help to preserve family wealth.
It is possible to gift in excess of £650k (for a couple) to family members without giving rise to tax charges depending on your personal circumstances.
There are ways in which to mitigate tax charges in every scenario, you should talk to a tax advisor to establish the options available to you.
We can help you achieve your goals but will look at a holistic solution to meet your needs.