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Taxation Readers’ Forum: Inheritance implications

3 September 2019

 

Writing for Taxation magazine’s readers’ forum, BKL tax adviser Terry Jordan answers a query from a fellow professional about minimising capital tax on a property portfolio.

‘I act on behalf of an individual who owns about a dozen buy-to-let properties which he bought over a period of some years during in the 1990s. The houses are all let to students and their values have increased significantly. My estimate is that these now have total accumulated capital gains of more than £2m.

My client is approaching retirement age and is keen to transfer the properties to his adult children so that he can save inheritance tax. Although this may make sense from that point of view, I have had to point out the problems with respect to the potential capital gains tax and stamp duty liabilities.

On hearing this, the client was not impressed and asked: ‘How did the Duke of Westminster manage to leave his properties tax free to his successor?’

I must admit that this question has occurred to me in the past and I wonder whether there are any lessons here for clients of more modest means.

Readers’ views would be appreciated on how to advise further in this matter.’ Query 19,417 – Duke.

Terry Jordan’s reply: inheritance tax will be paid by some trusts at 6% every ten years

I have no inside knowledge, but from press reports at the time of the late Duke of Westminster’s death it seems that much of the wealth is held in trust and the trustees pay 6% on the taxable value on each ten-year anniversary. When the fourth Duke died his brother, the grandfather of the present Duke, eventually won the argument that the ‘killed in war’ exemption now contained in IHTA 1984, s 154 applied.

With about a dozen buy-to-let properties the client might consider their transfer to a company claiming incorporation relief from capital gains tax under TCGA 1992, s 162 and reference could usefully be made to Elizabeth Moyne Ramsey v HMRC [2013] UK UT 266 TC. However, there would still be a liability to stamp duty land tax and the base cost of the shares received by the client would be depressed.

More straightforwardly, the client might transfer properties within his inheritance tax nil rate band to a trust for the benefit of his adult children and hold over the gain under s 260. Under current rules, he could repeat the process every seven years. If the client is married, he might transfer properties to his wife on a no gain/no loss basis under TCGA 1992, s 58 and she might later decide to settle some of them.

Another possibility would be to mortgage some or all of them and give away the sums borrowed as potentially exempt transfers.

The article is also available to subscribers on the Taxation website.

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