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Where Taxpayers and Advisers Meet

IHT on 2.4M property portfolio

LozaACCS
Posts:1504
Joined:Wed Aug 06, 2008 3:55 pm
Re: IHT on 2.4M property portfolio

Postby LozaACCS » Fri Jan 20, 2017 8:56 pm

The gain falls into charge on a disqualifying event, this will normally be a sale of the shares (which you can avoid) or the company failing to meet the conditions for EIS relief (eg becoming a non trading company), there is an interaction with ER.
The point you make is relevant if the intention is to incorporate a letting business and claim incorporation relief then carry on doing the same thing, I certainly do not believe that would work, the strategy has to be to do something different.
It is an interesting topic worth further discussion, unfortunately I am currently in severe pain with a prolapse, it is January and the number of days left is a worrying low fraction of the tax returns which still need to be done so I am unable to continue the dialogue this month, assuming the thread is still open in Feb I would be happy to contribute.

alive555
Posts:21
Joined:Mon Jun 29, 2015 1:23 pm

Re: IHT on 2.4M property portfolio

Postby alive555 » Thu Feb 02, 2017 5:51 pm

The fa does not think we can setup a development company which would qualify so we are now facing approaching a 1m bill.

No one appears.to have any plan other than eis shares . That involves selling which involves significant sales taxes of circa 7pc plus loss of rental revenue of net 2pc per year plus the cost of switching in and out the eis scheme .

Does anyone else have any better suggestions?

AGoodman
Posts:1213
Joined:Fri May 16, 2014 3:47 pm

Re: IHT on 2.4M property portfolio

Postby AGoodman » Fri Feb 03, 2017 12:36 pm

In order to qualify for BPR the company would have to do something pretty extraordinary. Holding/letting the flats is investment, rather than trading, and in order to qualify for BPR the company's business must not be "wholly or mainly" investment. Even if you could show that 50% of the "business" was actually trading by diversifying, the value of any property within the company that is not used for "trading" would still be excluded from the relief as an "excepted asset".

In order to get there, you would essentially have to establish a whole new business which develops properties and sells them - you would probably have to sell the flats and become an expert in property development. A company that just managed the flats without owning them should qualify but that gets you nowhere as the flats would still be subject to IHT; a company that both owned the flats and managed them would not qualify because it would still be classed as an investment business - google "caravan site BPR" to see the difficulty in trying to treat lettings as a trade.

There is very little that can be done here.

The only obvious possibilities are:

(a) gift the flats or sell the flats and gift the proceeds. 28% CGT will be payable on the gain in either case. This is unlikely to be a good idea because you run the risk of paying the CGT and then the IHT as well if they die within 7 years. As matters currently stand the properties will be rebased on death, avoiding the CGT.

(b) sell the flats, pay CGT and invest in an AIM portfolio - you still pay the CGT but avoid IHT if at least one parent survives for 2 years (assuming their wills leave their assets to each other).

This second option is far more likely to succeed but should only be undertaken with a specialist adviser who can put together a decent portfolio of AIM shares. AIM is risky (both in volatility and liquidity) but the risks can be reduced with good advice. It may be tricky (or impossible) to generate the same level of income but of course they could always spend some (the simplest way to avoid IHT).

All this should be set against the possibility that the flats may actually be a good investment and if one parent survives for 10-15 years you may see a significant increase in value which justifies holding them and simply paying the IHT.

Incidentally, I don't believe that borrowing to acquire AIM shares (or other BPR/APR property) will work. The rules were changed in 2013 (s.162B IHTA) so that the debt is deducted from the relievable assets first - essentially leaving the flats subject to IHT and making it pointless.

Andrew Goodman

AnthonyR
Posts:321
Joined:Wed Feb 08, 2017 2:33 pm

Re: IHT on 2.4M property portfolio

Postby AnthonyR » Wed Feb 08, 2017 2:53 pm

Bit late to the party on this one, but I'd make a couple of observations:

1. Andrew's absolutely right that any borrowing which is subsequently invested into BPR qualifying assets no longer provides any IHT relief (the borrowing is set against the BPR assets first). This doesn't apply where the assets are sold, but that invites the CGT problem. The gains could be rolled over into EIS shares, rather than AIM shares, but these tend to be higher risk, so you save 28% CGT and risk losing 100% of the investment.

2. LozaACCS suggested selling the flats and reinvesting into a property development company to claim EIS CGT deferral relief. However, property development is an excluded activity for EIS purposes, so the relief wouldn't apply. As Andrew suggested, taking the cash and creating a trading business qualifying for BPR would also be a challenge.

A further option could be to look at setting up a family trust and gifting up to £650,000 of the properties into trust. This would allow you to hold over the gain (assuming UK trustees) and the 7 year period would start to run. Bearing in mind the age of the parents though this may not be a strong option as they would need to survive for the full 7 years to avoid them being clawed back into the estate, however, from the date of transfer all growth is then out of the estate. Considering the way house prices are moving this could be a considerable saving over 5+ years. Plus there would be a saving of £130,000+ if one parent survives 7 years and £260,000+ if both parents did.

They would, however, have to be excluded from benefiting, which means they would not be able to retain the income or any other benefit. Plus, as mentioned earlier, it's unlikely to be effective if either needs to go into care as the LA would likely look through the trust. Trusts are complex and full advice should be sought.

Anthony
Anthony Rogers LLB CTA TEP
Fusion Partners LLP
anthony@fusionpartners.co.uk

alive555
Posts:21
Joined:Mon Jun 29, 2015 1:23 pm

Re: IHT on 2.4M property portfolio

Postby alive555 » Tue Feb 21, 2017 12:29 pm

thanks Andrew and Anthony

1. If we sell flats am i correct to say i can hold over the CGT using the relief mentioned and invest in qualifying asset ie eis shares.

1.1 - This qualification is 2 years from date of investing in eis shares correct ?
1.2 - In this event the saving is 100pc of the inheritance tax on the amount invested in eis?
1.3 - In this event the saving is 100pc of the CGT tax on the amount of flats sold ?

2. If we sell the flats and both parents die within the 2 year hold over period do we then get hit with BOTH CGT AND IHT ?

thanks for your input !

AnthonyR
Posts:321
Joined:Wed Feb 08, 2017 2:33 pm

Re: IHT on 2.4M property portfolio

Postby AnthonyR » Wed Feb 22, 2017 6:29 pm

1.1 No - rollover period is 3 years after sale (or 1 year before) to make the EIS investment
1.2 IHT holding period for BPR is 2 years - so having held the shares for 2 years they are 100% exempt
1.3 CGT is only deferred until sale (but can be re-rolled into new qualifying shares). On death the deferred gain is lost and effectively saved in full.

2. Just IHT. The deferred CGT is not chargeable on death.

However, as per the other post - this is a complex area and professional advice should be sought.
Anthony Rogers LLB CTA TEP
Fusion Partners LLP
anthony@fusionpartners.co.uk

alive555
Posts:21
Joined:Mon Jun 29, 2015 1:23 pm

Re: IHT on 2.4M property portfolio

Postby alive555 » Wed Mar 08, 2017 5:32 pm

OK have looked into this more.

the eis share option isn't good because the fees are huge !

upfront 4pc.
management 2-5pc per year
then exit fee of 20pc.of profit.
target yield is only 3pc !

so to sell property and move to this fund will cost circa 6pc sales fees and lost rent which is currently yielding 5.4pc.

so you lose the upside of any capital gains in property say 1-2pc per year plus 2pc better yield.

that will soon eat up the eis fund iht savings !!

so I'm. now.looking at gifting

summary

main residence 1.3m
flats 1.3m

father and mother 84/85. health not great


Question

if we say gift 50pc.of the house and 1 parent lives over 3 years am I correct to say

saving will be reduced from 40pc to 32pc

and after 4 years from 32pc to 24pc

then gift say another 2 flats of say 300k then similar saving.

the total saving after 4yrs would then be circa

main residence

1.3m less rnrb (say 1m)

300k @ 16pc = 47k

flats

300k @ 16pc = 47k

saving 94k out of 800k !!!

not good !!

any better suggestions?

AnthonyR
Posts:321
Joined:Wed Feb 08, 2017 2:33 pm

Re: IHT on 2.4M property portfolio

Postby AnthonyR » Wed Mar 08, 2017 7:40 pm

It's only the tax that's tapered, not the rate of IHT.

If your parents gift part of their home with them still living in it it's likely to be a gift with reservation and ineffective for IHT.

If your parents gift the BTL it'll trigger CGT.

You need to seek some proper advice from an IHT specialist, these forums will only take you so far.
Anthony Rogers LLB CTA TEP
Fusion Partners LLP
anthony@fusionpartners.co.uk

alive555
Posts:21
Joined:Mon Jun 29, 2015 1:23 pm

Re: IHT on 2.4M property portfolio

Postby alive555 » Thu Mar 09, 2017 3:21 pm

thanks

we have taken professional advise and the main option is :-

- To sell some of the flats and put the proceeds into an EIS (CGT rollover relief, and Inheritance Tax relief after 2 years).

remember :-

house 1.3m
flats 1.3m

total 2.6m

even worse - we can't even get qualified for the rnrb as the estate value is over 2m !!

also complicated by fact we need the rentals from the flats to pay for dad's care home costs

stuck!

any way to get qualify for the rnrb?

njpbennett
Posts:1
Joined:Tue Aug 15, 2017 11:00 pm

Re: IHT on 2.4M property portfolio

Postby njpbennett » Tue Aug 15, 2017 11:11 pm

It may be possible to created reversionary leases for the rentals.

Subject to landlord's consent your client leaseholder could create sub leases with commencement dates not more than 21 years in the future. They can retain the income during this period with no reservation of benefit.

They give the sub leases away creating a loss to their estates, a PET for IHT. This is a disposal for CGT but it would have a low value and could be transferred to a trust for hold over. Watch out for 20% entry charge.

These are easier to do if your client owns the freehold. There are some recent cases where these have been challenged by HMRC for leasehold (Buzzoni)

The recipient of the leases receive at very low base cost so a CGT issue for them to deal with.


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