Gifting share of mixed-use properties to children

[Another John]

My wife and I have 5 mixed-use (shop with flats on single freehold title) properties that we've been renting out as a partnership for 30 years.

Our children are now 29 and 24 years old and we would like them to share in both the ownership and profits.

We would like to keep tax costs to a minimum, whilst gifting enough equity for them to legitimately share in the rental income.

We are currently in the process of remortgaging the portfolio, so we thought it might be a good opportunity to make any Land Registry changes simultaneously as interest in the properties are being transferred from the previous lender to the new one.

We would also like to do as much as possible to mitigate IHT in this whole exercise as well.

I'm sure this would pose many questions to people in-the-know, but those that I can think of are:-

1. What's the minimum equity-share that the children can own to be eligible for taking an agreed portion of rents?

2. Would they need to be joint borrowers?

3. Could this be done as a P.E.T?

I have been told that the best way of getting the children involved - and at a NIL cost for SDLT, CGT and IHT - is via a hybrid LLP and Ltd Co. but I cannot get my head around that whatsoever!

P.S
I know Maths is usually the person who very generously comes to everyone's help but I appreciate that this is business and it's quite involved so I would be happy to pay for advice on this one - whether as a fee or as a donation to a charity.

[AnthonyR]

This is a complex area and will depend on your long term intentions and whether you need to retain access to the income and capital.

I've seen a lot of talk from promoters/sales people recently about the advantages of a Hybrid Partnership, but none really seem to take into account the complex CGT/SDLT/IHT issues (I've seen some suggest that making it a property management business means the entire portfolio benefits from BPR). They also seem to ignore the anti-hybrid provisions that were introduced by HMRC in 2014.

There are options available to you, including a properly structured partnership and family trust planning (which can help remove CGT and SDLT issues - but require that you give up the right to income and capital going forward).

In respect of a family partnership, the main issue that you'll face is the fact that any transfer of equity is likely to trigger CGT on the value transferred.

The key questions to start the discussions are probably: What sort of values are involved, what do you want to give away and do you need to retain the income?

[SteLacca]

There are various options and you should probably seek proper, paid for advice.

An immediate thought if you can stand the immediate CGT and SDLT charges on residential proportions is a family investment company. For the commercial side incorporation relief should be available.

Once the properties are enveloped, your children become shareholders, entitling them to income. The value of the shares is tied to the value of the properties, and they can simply make their own children shareholders at the appropriate time to enable continuity through generations.

Having said that, no options are straightforward. As I said, comprehensive paid for advice is what you need.

[maths]

As the above two posters have pointed out, and as you clearly recognise, the matters you raise are somewhat complex.

You say "we've been renting out as a partnership for 30 years". Are you using the term "partnership" in its legal sense or colloquially ?

For most jointly held investment properties (by husband and wife) there is no "partnership", just property simply held in joint names.

Care needs to be exercised before going down the route of hybrid partnerships, LLPs etc. You are correct that the tax literature/tax advisors "peddle" advice but often their suggestions are untested and, as mentioned above, relatively new anti-avoidance provisions have been introduced.The tax literature is also littered with arguments as to what constitutes "a business " for various tax purposes when property letting is involved.

It may well be that your various goals can be achieved without over-complicating matters.

I apologise for the lack of specific advice; thank you also for your kind comment.

[Another John]

Oops, sorry everyone - I didn't get an email notifying me of your replies.

Thank you all for taking the trouble to reply with your helpful comments.

I fully appreciate the fact that it's now high time to get some paid help here so, as I subscribe to Tax Insider, I've decided to have a consultation with the property tax expert, Arthur Weller, on Monday. Even though my understanding of tax matters is very limited, I have been impressed with that publication so I feel confident that the advice I'll receive on Monday will be be bang-up-to-date and with regard to HMRC's ongoing review of all aspects of property taxation.

Maybe after all this I may be able to offer a little help to other posters like you guys do (?).

All the best to you all.