Mr. Greenwood has recently retired and was concerned about the potential inheritance tax liability on his Estate, currently estimated to be worth approximately £2 million.
Mr Greenwood wanted his family to receive the maximum amount possible from his estate. He was happy to pay the tax he owed, but like many of our clients, he was looking to minimise the amount of tax payable by his estate.
Passing residential property to children and grandchildren with minimal tax liabilities
Included within Mr Greenwood’s estate is a residential property that he bought in 2000 for £183,600, including legal expenses.
- He lived in the property for 4 years and 3 months as his main residence, after which he moved out to live with his wife, who never occupied the property as her main residence.
- The property’s market value at the time was £600,000 and it generated a healthy rental income.
Mr. Greenwood had sufficient funds and other properties to sustain his income, and didn’t require the property himself. He was keen to undertake some tax planning to mitigate his estate’s inheritance tax liability, so he could pass the property to his children and grandchildren.
IHT is a complicated process to navigate alone
Along with passing the property to his descendents, Mr Greenwood hoped to minimise any tax liabilities in the process.
Although there are some general tax planning tips for minimising Inheritance Tax, the most effective advice comes from assessing your personal situation.
Not only can the rules seem complicated, but they do change – and so we always recommend speaking to an IHT specialist to figure out the best options for you, based on the current rules.
Mr Greenwood recognised that he needed expert advice on his options, and called on our IHT team for support.
Expert support helped Mr Greenwood understand each option and its tax implications
We helped Mr Greenwood understand the ins and outs of two options:
- Gifting his estate to the children/grandchildren outright or,
- Gifting his estate to a discretionary trust
OPTION 1 – Outright gift to children/grandchildren
If Mr. Greenwood were to make an outright gift of the property to his children and grandchildren he would have to pay capital gains tax on the disposal.
The charge would be:
Obviously £84,000 is a considerable amount of tax and Mr. Greenwood had expressed that he would prefer not to pay any tax at this point. We suggested he could consider the use of a discretionary trust.
OPTION 2 – Gift to a discretionary trust
If Mr. Greenwood were to gift the property to a trust, he would be able to hold over the gain illustrated above. However, he would be subject to Inheritance Tax on the lifetime transfer to a trust. This would be taxed at the lifetime rate of inheritance tax (currently 20%), calculated as follows:
*Assumes IHT annual allowances have been used on other gifts.
The use of a trust had substantially reduced the tax burden by £29,000, but there was still a tax cost to this option. If Mr. Greenwood were to transfer a 50% interest to his Wife it would be possible to totally eradicate any tax liability.
The Solution – A gift to Mrs Greenwood, followed by a gift to a discretionary trust
Transfers of chargeable assets between spouses and civil partners do not generate any capital gains tax liability. Prior to the creation of a trust, we recommended Mr. Greenwood transfer a 50% interest to his wife, which would pass at no gain, no loss.
Mr. and Mrs. Greenwood could then both transfer their interests in the property into a discretionary trust. As their interest would be £300,000 each, and this is less than the current inheritance tax nil rate band of £325,000, the gift would not be subject to any lifetime inheritance tax.
Seven Year Rule
For both an outright gift and gift into trust, the transferor must survive 7 years from the date of the gift for it to be fully outside of their estate for inheritance tax purposes.
Mr. Greenwood is young enough that it is assumed that he will survive the next 7 years. We considered these planning points the most sensible steps for him to consider.
N.B. Trusts are not a suitable vehicle for every person and the use of them is not recommended in every case. Independent tax advice should always be taken for your own personal circumstances.
Needless to say, Mr Greenwood was exceptionally happy with our recommended advice and the £84,000 tax saving which was achieved.