This site uses cookies. By continuing to browse the site you are agreeing to our use of cookies. To find out more about cookies on this website and how to delete cookies, see our Cookie Policy.
Analytics

Tools which collect anonymous data to enable us to see how visitors use our site and how it performs. We use this to improve our products, services and user experience.

Essential

Tools that enable essential services and functionality, including identity verification, service continuity and site security.

Where Taxpayers and Advisers Meet

IHT on 2.4M property portfolio

alive555
Posts:21
Joined:Mon Jun 29, 2015 1:23 pm
IHT on 2.4M property portfolio

Postby alive555 » Fri Dec 02, 2016 3:35 pm

Going round in circles !!! Literally for a year now as different advisors suggest different solutions none of which appear to save much . Help !

Heres the summary ;-

2 parents age 84
Main residence 1.4m (no mortgage)
8 flats 1m (no mortgage)

2 children
IHT Liablity today assesed at 780,000

Aim ; reduce inheritance tax

Background : lawyer has suggested 2 options

1. take mortgage of house for 500k and invest in aim shares
2. sell 2 flats raise 400k and mitigate iht

ps parents dont qualify for life insurance


question ?

1. whats the best solutions to mitigate IHT ?
2. i have around 500k cash and live offshore with offshore company. is it possible to use the cash to create a lien against some of the property to reduce iht ie by way of issuing a mortgage or other ?

thanks in advance

LozaACCS
Posts:1504
Joined:Wed Aug 06, 2008 3:55 pm

Re: IHT on 2.4M property portfolio

Postby LozaACCS » Fri Dec 02, 2016 8:33 pm

The answer to Q2 is most probably not.
The first suggestion has some merit but being a cynic I would suggest that you might end up losing a lot to save a little, however the BPR route seems a possibility given the circumstances.
You should have looked at effective planning a long time ago, so you are a bit boxed in, that said you have not posted here to be lectured.
You could consider;
Selling any number of flats,there are obviously CGT issues here.
Form a limited company that will qualify for BPR, eg a property services or property development company, your parents could be the shareholders.
Invest the proceeds from the flats into the new company which itself must invest the funds into its trading activities.
Any gains from the sale of the flats could be frozen utilising Sch5B TCGA 1992, if you actively manage the project you can achieve BPR status within 2 years.
You should seek formal advice from a tax professional in your area if you are interested in this option.

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

Re: IHT on 2.4M property portfolio

Postby alive555 » Sat Dec 03, 2016 11:30 am

Thanks very much, i have been looking into this before but hitting brick wall (good work!)

Im very interested in this ;-

"Form a limited company that will qualify for BPR, eg a property services or property development company, your parents could be the shareholders.
Invest the proceeds from the flats into the new company which itself must invest the funds into its trading activities.
Any gains from the sale of the flats could be frozen utilising Sch5B TCGA 1992, if you actively manage the project you can achieve BPR status within 2 years.
You should seek formal advice from a tax professional in your area if you are interested in this option."

q1.

what do you mean by "Invest the proceeds from the flats into the new company which itself must invest the funds into its trading activities"

do you mean sell the existing 8 flats ?
why do we need to sell the flats ?

q2.

can i invest in the newco development company and inject cash as a loan ? or alternatively invest as equity. any advantage for iht purposes ?

q3.

as alternative option to setting up newco (with the cgt issue) is there any benefit in leveraging the flats and / or the house and say investing in aim shares ? do you need life insurance for this ?


thankyou VERY MUCH FOR THIS

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

Re: IHT on 2.4M property portfolio

Postby alive555 » Sat Dec 03, 2016 11:33 am

sorry just noticed i think you already answered my q3 !

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

Re: IHT on 2.4M property portfolio

Postby alive555 » Sat Dec 03, 2016 11:37 am

as replacement for q3

assuming we can get bpr for the flats with newco, is it also worth looking at gifting the house and at least getting some relief under the 7 year rule ?

the house is 1.4m and the joint allowance is 650 rising to 1m by 2020 is this correct ?

thankyou once again

maths
Posts:8230
Joined:Wed Aug 06, 2008 3:25 pm

Re: IHT on 2.4M property portfolio

Postby maths » Sat Dec 03, 2016 2:41 pm

Estates need to be equalised (which they may already be if each spouse owns 50% of aggregate 2.4million)

Each estate comprises 700k interest in house and 500k in flats.

Residence nil rate band of 100k (17/18 rising to 175k in 20/21).

Spouse leaves 50% interest in house to kids and 500k to surviving spouse.

Assume deaths in 17/18.

On death of first spouse to die:

IHT at 40% on [700k - 100k - 325k] ie 110k.

On death of second spouse to die:

IHT at 40% on [700k + 500K + 500K] - [100k + 325k] ie 510k

TOTAL IHT 620K on both deaths.

Whilst of course it makes sense to investigate use of BPR, EIS etc it is often the case that whilst in theory IHT is saved in may cases the underlying investments (eg AIM shares) dive in value.

Make sure you utilise lifetime gifts a major one being gifts which constitute normal expenditure out of income which are unlimited with no need to survive 7 years

LozaACCS
Posts:1504
Joined:Wed Aug 06, 2008 3:55 pm

Re: IHT on 2.4M property portfolio

Postby LozaACCS » Sat Dec 03, 2016 9:17 pm

My rationale for the BPR route is based on the size of the estate and the age of the parents, at 84 it may be pretty futile to be transferring assets between each other, either as lifetime transfers or on death.
The reason for forming a company is that you (or your parents control it),so it cannot go bust on you,(thus avoiding the AIM issue), the problem with EIS relief is that a holding in excess of 30% does not qualify for income tax relief, but this rule does not apply to CGT.
Therefore applying the mantra that 2 years is better than 7, there is a planning route available.
To get BPR the company must have received capital and invested it in the business within the stipulated period (see Sch 5B TCGA 1992), this can then be sheltered after 2 years using BPR, APR would probably be unattractive on the basis that your parents would not be thrilled at the prospect of running a farm for 2 years.
So the logic is to introduce capital to the new company by selling one or more flats, any gains can be deferred using Sch 5B and the monies received can be used to subscribe for shares in the new company which will qualify for 100% BPR if you get the planning right.

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

Re: IHT on 2.4M property portfolio

Postby alive555 » Wed Jan 18, 2017 7:29 pm

Thankyou

So are you saying the cgt will still be payable ?

The reason is the 1m flats were bought for a few thousand so the cgt would apply on 99pc of the current value!

LozaACCS
Posts:1504
Joined:Wed Aug 06, 2008 3:55 pm

Re: IHT on 2.4M property portfolio

Postby LozaACCS » Thu Jan 19, 2017 9:46 pm

No, not if you get the planning available through Sch 5B TCGA 92 right, technically the gain is a deferral rather than an exemption.

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

Re: IHT on 2.4M property portfolio

Postby alive555 » Thu Jan 19, 2017 11:45 pm

Thanks this is what I'm looking at now . Still not clear about the cgt benefit !

Couple of questions if I may (pls elaborate if possible as I want to run this through my lawyer again)

1. So if the cgt is a "deferral" not an exemption when is it payable in this example ?

2. Am i correct to say the newco property company would qualify for bpr only if it's a managed property development business and not a passive investment. I heard this may not work as hmrc would want to see a much larger portfolio than 300k in a couple of flats !

Here's something I found second paragraph

https://www.taxation.co.uk/Articles/201 ... ss-out-bpr

Pls let me know what you think and much appreciated


Return to “Inheritance Tax, IHT, Trusts & Estates, Capital Taxes”