Protecting the future

For most people, their properties are their most valuable asset. And for anyone with children, the consequence of not having made provision for estate planning may be devastating. Passing on rental property to loved ones, however, can be a complicated process filled with many potential pitfalls. But by taking appropriate steps to mitigate your inheritance tax (IHT) bill as well as avoiding capital gains tax (CGT), you can optimise the value of your property and protect the future income for your family.

Usually, if you want to transfer a buy to let (BTL) property to your children, CGT liability would apply because HMRC states that the parent received the market value of the property - even if the property was handed down for free. That CGT will be based on current market value, minus purchase price, minus capitalised refurbishment costs.

Currently, the rate of capital gains tax to be paid on BTL properties – after using the £11,700 CGT annual allowance – is 18% for basic rate taxpayers and 28% for higher rate taxpayers.

While trusts are generally viewed as the exclusive domain of the well-heeled, ordinary homeowners could also benefit from placing their property into a trust. An individual might wish to gift a buy-to-let property to their child and use a trust to manage the asset until the beneficiary comes of age. The benefit of this action will depend on certain conditions that the settlor specifies, while the settlor may themselves also benefit from the trust.

To take advantage of a trust as a tax relief vehicle, let’s recap the four steps to follow: Identify a property that has a value below the IHT threshold. i.e. less than £325,000. You can use a property with a higher value, but it will be subject to 20% IHT. Transfer the property into a trust and determine the IHT liability. Wait a minimum of three months after setting up the trust then transfer the property to an adult child. Calculate the exit charge.

HMRC can even tell you how to set up a trust. Bear in mind though, that tax calculations can get extremely complex, and we therefore strongly suggest you consult a property tax specialist or finance planner from the outset.

If you would like to know more about a new or re-mortgage please do make contact and one of our independent advisers will be happy to assist.