Transferring properties from parent to children

[Deras1]

I am looking the most cost(tax) effective ways of transferring properties from parent to children.
Three so far have been in my mind but the internet research has only led me so far.. perhaps I can ask you kind people if you have any input or suggestions regarding my options.

Option 1 = Create a property company
Cost = The landlord needs to sell his properties to the new company , hence considerable costs of transfer applies
Avoided costs = inheritance tax

Option 2= selling to children at 1 pound (rest is considered as a gift)
Costs = stamp duty, income tax, capital gains tax
Avoided cost = inheritance tax (if the parents do not die after 7 years)

Option 3 = Freeholder(parent) gives it as a lease. Leaseholder =children
Costs = no costs? But have to come to terms to becoming a leaseholder instead of full landlord… or is there not much of a practical difference… both of them enjoy landlord rights…?
Avoided costs= all?

1) have I researched correctly (I am particularly wary of the third option…is that even possible), and
2) which option is the least costly?

Many thanks for reading my post
Any feedback is appreciated

[Lambs]

D,

Option 1 does not avoid IHT if there is a sale, since the brick and mortar assets will be replaced by money or a debt from the company and some shares in what may be a valuable company. Note that if the properties are not transferred for full value then CGT is charged on full value anyway. If the parent is NOT the only shareholder then there will be a Lifetime IHT charge, essentially to reflect the reduction in the parent's Estate. The gift element to the company is not a PET, because it is not between warm bodies.

Option 2 will incur SDLT only if there is valuable consideration. £1 would not raise much SDLT but beware if the properties are subject to a mortgage, since agreeing to take on the mortgage debt IS treated as valuable consideration for the purposes of SDLT. Not sure why there might be an Income Tax charge on such a transfer. Not sure why you think it needs to be transferred for £1. But definitely CGT as transfer designed to confer an element of bounty so not arm's length (and connected parties anyway) so Market Value for proceeds regardless of consideration actually changing hands. If sold for full value then IHT-neutral: there's no PET because the parent's Estate is essentially unchanged: money in exchange for bricks and mortar.

Option 3 I think you may have this the wrong way around: From an IHT planning position, the parent usually transfers the property to the child subject to a lease, whereby the CHILD holds the reversionary interest and the PARENT is the lessee. Value of lease unwinds in parent's Estate over his/her lifetime balanced by an increase in value of reversionary interest held by child. This is plausible for IHT. This has traditionally been done with the parent's main residence to limit CGT exposure on transfer. I don't think I've seen it done with a property portfolio. It could be quite complex / laborious to implement in practice. You would need to take good advice, particularly if there is significant value in the portfolio. And it would depend on a good appreciation of the overall purpose and intended benefits of the transfer.

Regards,

Lambs

[maths]

It all depends upon the underlying facts.

One solution is to transfer the properties on bare trust(s) for the child(ren)'s benefit.

This has a number of tax advantages.

[Lambs]

M,

I was assuming kids were adult, given that the querist spoke of direct sale / lease.

VB,

Lambs

[maths]

Fair point.

Perhaps poster could clarify how many children, ages and what he's trying to achieve.

[AGoodman]

Involving leases pointless unless you are wanting to live in the property(ies) - in which case you definitely want proper specific professional advice. Granting a long lease at an undervalue is virtually the same for CGT and IHT as giving the freehold away.

Any form of gift will be a transfer of value for IHT and a disposal for CGT. You only want to consider a company if you want to end up having the property(ies) in a company. It just adds SDLT into the mix. As already mentioned, you've still got to give away the shares or benefit of the loan.

If you don't want to end up with a company then your three options are:

(a) outright gift - benefit of simplicity
(b) bare trust - tax is the same as outright gift but you retain control.
(c) gift into full trust for children - chargeable transfer so can only gift £325k or £650k if you have a spouse who can give half. The benefit is no CGT as you can holdover (defer) the gain. The cost may be (relatively) small IHT charges on 10 year anniversaries or exit from the trust. You could transfer out again before 10 years, with holdover, potentially deferring CGT again.