Many landlords are people of some wealth, and as investors many will be thinking about passing on their hard-earned wealth to the next generation.
In that regard, inheritance tax (IHT) is a bit of a bummer. The thought of passing nearly half (40%) of your life’s work is certainly not appealing at all!
Of course there are allowances, generous allowances some would say, but not generous enough if you have substantial wealth, as some will have, and now the new Labour government could be planning to make it far less generous.
We don’t know this for sure, of course not, it could be the usual pre-budget speculation, but IHT must be a target as Labour has promised to leave a lot of the mainstream taxes alone, and they desperately need to raise money given their expensive plans.
With the budget scheduled for the end of October it’s decision time: do you take the plunge and pass on wealth before the October 30 deadline, in the hope of avoiding a potentially large slice of tax, or do you wait and miss a golden opportunity?
Unless you are privileged to some inside information (unlikely) it’s a gamble, but is it a gamble worth taking? If you are planning to pass on some of your money eventually, then bringing that forward may not be such a big deal, because we know almost for sure the budget won’t make IHT reliefs any better, and there’s a high chance they will be made worse.
This is a guide, not advice. Seek professional advice before taking any action, or not
Many wealthy people will maintain that they won’t be passing on their wealth to their children. Then when it comes to the crunch, they do! Perhaps they don’t want to spoil their offspring, giving them the impression they won’t need to even try in life, no need to work hard to succeed like their parents did. There are many examples of this.
Passing on wealth earlier though carries with it a risk, a risk that children (or adults) will be tempted to squander their newfound affluence. But as the other argument goes, why wait until it's too late rather than help your children to succeed and have the enjoyment of seeing them get on?
There are ways of safeguarding, ring fencing the gift by setting up various trusts, but lots of other considerations come into play: complexity, setting up fees, taxation rules, ongoing accounting costs etc. Every case is different, and you alone know the character of your children and how they will handle an influx of money.
The new government has left something of a void. There’s been a long period of uncertainty from the day of the election win, now until the 30 October budget, and most experts agree, uncertainty is not good for companies, individuals or the general economy. It has led to a lot of speculation resulting in a lot of people making some big decisions and some very large transactions, with IHT and capital Gains Tax (CGT) changes in mind.
Are you aware of the value of your Estate and your potential exposure to IHT under the current regime? If you don’t, the first thing to do is value everything and deduct any liabilities to arrive at your net worth.
Currently, an UK individual is entitled pass on the whole of their estate tax free to a spouse, and when passing to others to a relief on death known as the “nil rate band” of £325,000. This can be topped up with potentially a (homeowners) “residence nil rate band” of £175,000.
This potentially gives IHT relief of £500,000 or £1 million per married couple. The proviso is, it is left to children and/or grandchildren on death. After that, the current rate of IHT on the remainder of the estate is 40%.
An unlimited exemption applies when assets are transferred during your lifetime and/or on death to surviving spouse, civil partner, a charity or a community amateur sports club. If your spouse’s nil rate bands have not been used, they are available to him or her. The surviving spouse will potentially give the tax-free amount on their death of £1 million.
If the estate of the first of a couple to die is worth more than £2 million, tapering will reduce the amount of the unused residence nil rate band in that estate. This in turn reduces the amount of residence nil rate band that is transferable to the surviving spouse or civil partner's estate.
However, if the remaining estate on the death of the first spouse exceeds £2 million, the relief is reduced by £1 for every £2 that the estate exceeds £2 million. Consequently, for very wealthy couples, the relief will reduce the residence nil rate band to nil where the value of the estate exceeds £2.7 million, leaving just the combined basic nil rate bands of £325 times two, or £650,000.
Transfers during your lifetime?
Under the current tax regime, no IHT is due when you survive seven years following the date a gift has been made. These transfers (gifts) are known as ‘potentially exempt’ transfers (PETs) and IHT is only payable should you not survive the seven years. If someone should die before seven years the gift is subject to IHT on a sliding scale, but this is a complicated calculation and not as generous as it may seem at first sight.
To ensure a gift is an effective means of avoiding IHT it is important that it is an outright gift, that is, the giver cannot continue to enjoy any benefit from the asset. For example, a parent cannot pass on his or a couple’s home and still live in it without paying a market rent to the new owner, a child for example.
For some assets – not normally a main residence - there may also be a Capital Gains Tax (CGT) liability when making a lifetime gift, though, in some circumstances it may be possible to defer the capital gain and therefore any CGT payable. It is important to seek professional advice and establish what relief you may be entitled to before making any transaction.
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