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  • Tax

    Wealth management and tax planning

    Louise and her property tax specialists recently wrote an article that I thought would be a useful read.

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    I’ve been speaking to property investor clients over the last few weeks about wealth management and tax planning – two key areas to consider when building and then protecting a profitable property portfolio.

    Some of the questions I ask my buy-to-let landlord clients include:

    • Are you keeping your fair share of earned income or is HMRC taking more than what seems reasonable?
    • Are you protecting your hard earned wealth for future generations, or are your assets under threat from HMRC’s Inheritance Tax or family mis-use?
    • Are you getting the best returns from your investments and assets, or are your investment managers getting a better deal?
    • Do you know how your pensions are performing, and are you pleased with it or could it be better?

    My property investment clients spend substantial amounts of their time working, either as an employee or in their property businesses, and I believe that the blood, sweat and tears put into their property portfolios deserves a reward that’s tax-efficient today and in the future.

    How can you effectively manage your wealth planning?

    My clients typically come up against similar issues in their property portfolios based on the key areas of wealth management and tax planning.

    Once they have taken money from their property business, they invest some of that money into savings for a rainy day.

    The problem is that many buy-to-let landlords invest without monitoring the ongoing performance once invested.

    This doesn’t stack up – after all, you wouldn’t decide to work hard on your property business Monday to Thursday, only to ignore your customers on a Friday.

    Sadly, some property investors take this approach when it comes to their investments.

    As such, their investments over time yield very poor returns for them, and yet – more to the point – their investment managers and HMRC take big cuts.

    To add to the delights of others taking their cut, I know that family matters can also create huge changes in wealth for my property investor clients.

    I know, for example, of husbands and wives separating: with children involved and this phase of a relationship can be an enormous emotional rollercoaster,  which sometimes leads people to make decisions that they would not ordinarily do regarding their wealth management and tax planning matters.

    Another area that my property investor clients need to consider is death. Death is not a subject that many of us like to talk about. However it is necessary to ensure that loved ones receive wealth after the inevitable.

    There are many examples I’ve been told where buy-to-let landlords build wealth with a clear expectation of how they want this passed through generations of family, but due to lack of wealth management, the wrong people receive the money and assets.

    And if a property investor hasn’t drawn up a Will before their death, the Crown receives ALL of the assets.

    It’s also worth remembering that when you die, you could be leaving loved ones to deal with the fact that the estate is subject to HMRC’s 40% Inheritance Tax. Wealth management and tax planning are so vital.

    What measures can be taken to protect your portfolio?

    I work with property investor clients to get them in a position where:

    • They keep more of what they earn and shield their wealth from HMRC’s income tax today and going forwards
    • Their investments are stored in a tax-efficient vehicle and provide them with returns that build wealth
    • They structure family assets to legally and safely avoid inheritance tax applying to their estates
    • They build in systems and legal documents to ensure that they manage where their wealth goes, when and how, and with no one after their death able to manipulate this

    Below is a typical example – with client names and specific details changed for privacy purposes:

    Sandra is a wealthy lady that was widowed by her first husband a number of years ago. She is now involved in another relationship, and is due to be married within the next few months. She is a high rate tax payer as an employed medical consultant, and has two grown up sons aged 20 and 23 respectively.

    Her soon-to-be husband John has a business from which he takes each year wages and dividends that means he remains a basic rate tax payer. He also has three adult children of his own.

    Sandra has property income in her sole name as well as her salary, and wants to ensure that her two children are protected from any issues that she may face in the future with her new partner.

    There are a number of major tax issues here, including:

    • Recent tax legislation changes mean that her portfolio will be taxed at 65% because of the mortgage interest relief cap by 2020/21.
    • If she separates from John in the future then her wealth and assets will most likely be divided between her two children and his three children.
    • As her net assets are over £1m, when she dies there will be an inheritance tax bill of 40% on her estate over and above the first £325,000 (before she gets married). On calculation of the detail, there is a likely Inheritance Tax liability of £270,000.

    The wealth management and tax planning solutions I devised included:

    1) Put in place legal documents to amend ownership of the property income post-wedding, so that John gets the majority of the property income (as he has agreed to manage the properties).  This means he will be taxed at the basic rate of income tax which is 20% – this saves a lot of tax. In this case, the tax liability would be reduced by 2021 by at least £6,500 per annum.

    2)  Have Wills that specified which children got which assets in the event of death. Sandra’s home would be put into trust so that her partner would take possession of the house to live in, but on his death would be passed to her two son’s only. She made specific provisions to ensure that her two children had to be married with decent jobs before they took control over the assets. Albeit they were mature, she knew that they could still make rash financial decisions that could erode their wealth unnecessarily and needed more life experience before being able to make decisions about what to do with her home.

    3)  Restructure her pensions from being paid to her spouse (50% to spouse and 50% lost on her death) to her sons and that they would benefit from 100% of her pension in the event of her death.

    4)  Invest more of her salary into her pension (now sharing living expenses with John meant that she did not need all of her earned money to live comfortably) which also benefited from tax relief.

    5)  Commence handing over some of her income producing investments to her two sons in a tax efficient way to make best use each year of her capital gains tax allowances.  The added advantage of this was that slowly over time it was reducing the size of her estate and therefore helping to minimise any inheritance tax that would be payable at her death.

    6)  Gift one of her buy-to-let properties to her sons without the payment of Capital Gains Tax (CGT) or Stamp Duty Land Tax (SDLT) yet benefitting from the future mitigation of inheritance tax. This also allowed her sons to get onto the property ladder themselves, and become even more independent.

    The above work saved at least £6,500 income tax per year and over £150,000 from the future inheritance tax bill. This also provided a peace of mind that there was a structure in place that was agreed by both Sandra and John.

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    Simon Misiewicz | Business Development Manager

    Optimise Accountants

    Telephone: 0115 939 4606

    website: https://www.optimiseaccountants.co.uk

    I really support this kind of advice

    it's so important now to plan

    the world has changed so much in BTL you need to think outside the box

    plan plan plan and more planning

    if you don't the government will just take and take off you

    whats wrong with having a pension property is not the only way to wealth

    if you only depend on BTL you may not get the dreams you are looking for s24 will rob you blind

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    Learn Change and Adapt ?????


    "Gift one of her buy-to-let properties to her sons without the payment of Capital Gains Tax (CGT) or Stamp Duty Land Tax (SDLT"

    Can you please explain this in more detail?

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    Are you worried about the mortgage interest relief cap and how it will affect your personal tax position?

    Are you concerned about inheritance tax (IHT)?

    You may want to transfer properties from your estate to your children but do not wish to pay Capital Gains Tax (CGT) and would like to avoid Inheritance Tax (IHT). Ordinarily, there will be a CGT liability if you wish to transfer a Buy To Let (BTL) property to your children. This is because HMRC deem that the market value of the property was received by the parent, even if the property was given away for free. CGT will be based on market value, less purchase price, less capitalised refurbishment costs.

    The rate of CGT to be paid on BTL properties is 18% for basic rate tax payers and 28% for high rate tax payers after taking out their £11,100 CGT annual allowance.

    We discussed how to minimise CGT by using a number of methods using a) Private Residency Relief PRR b) Enterprise Investment Schemes EIS and C) Incorporation relief (transferring assets into a limited company). Albeit these are sound CGT mitigation strategies there is an additional element that will help on transferring one BTL or a very small portfolio without CGT or IHT. You can do this by using a trust.

    What is a Trust?

    A Trust is a mechanism in which a property is held by the trustees for the benefit of someone else. We talked about Discretionary Trusts and Transferring assets to mitigate IHT using trusts in previous articles so we will not go into detail here. The one thing that these articles did not discuss was how to avoid CGT when transferring properties into a trust.

    We will now focus on the subject of transferring a BTL property into a Trust whilst avoiding CGT and IHT. The piece of legislation that we will focus on is Section 260 of TCGA.

    If the trustees pay, the rate of tax is 20% over and above the IHT allowance (£325,000 per person). If the settlor pays the Inheritance Tax instead of the trustee, this means there will be an increased loss from the settlor’s estate. These calculations are complex as can be seen on HMRC’s website and legislation pages. This is made a lot more complicated if transfers have been made in the past 7 years. Added to this is the additional IHT reliefs for gifts, weddings etc. For this reason alone we would ask you to seek specialist advice.

    Why use this strategy?

    You would transfer BTL properties into a trust and back to your adult child for the following reasons:

    • Reduced income tax for the parent (especially if they are a high rate tax payer)
    • Provides an income for the adult child
    • Reduced the asset value of the parent for IHT purposes

    Properties into trust and mortgages

    It is very unlikely that the mortgage company will support the use of this tax avoidance strategy. As such you will need to ensure that all mortgages for the property is paid off and remain unencumbered upon the transfer.

    Example of assets transferred into Trust with NO consideration paid

    Lets now imagine that a father wishes to transfer an asset worth £450,000 to his adult child. He originally purchased the asset for £300,000. Ignoring CGT annual allowances he has a gain of £150,000 and will be taxed at 28% as he is a high rate tax payer. The CGT liability would ordinarily be £42,000.

    By gifting the property with no consideration the CGT liability of £42,000 is now ignored.

    Transfer of assets to minors

    You need to be aware that the above strategy will not work if you are transferring assets to a minor. This is because any assets passed from parent to a minor remains an asset of their estate and any income derived from the asset is treated as income for the parent. As you can see that this only works whereby you transfer assets to an adult child.

    IHT liabilities & Exit charges by transferring assets into trust and then onto the child

    It is essential that you wait at least three months before you transfer an asset within a trust to your child; and transfer the property out of the trust within 3 months of the 10 year anniversary of the trust to ensure that CGT holdover relief is available.

    Once you decide to transfer the asset from the trust to your child you will need to consider exit charges. The exit charge is another form of tax over and above the 20% paid. The value of the asset is the net asset value of the property.

    This is a little more complicated so we will use an example:

    • £450,000 asset value
    • £325,000 less the nil band rate for IHT purposes
    • £125,000 asset value chargeable to IHT on transfer into trust
    • £25,000 IHT paid (£125,000 times by the 20% IHT rate)

    We are now able to calculate the exit charge rate as follows:

    • £25,000 IHT liability paid on transfer
    • 5.56% being the notional tax paid of £25,000 divided by the asset value of £450,000
    • 1.332% charge rate being 5.55% times by 30%, times by 32 being the number of complete quarters of the trust set up, divided by 40 (10 year anniversary of the trust being created)
    • £6,000 being the exit charge of 1.332% times by the asset value of £450,000

    As you can see that the total IHT liability on transferring an asset of £450,000 into trust is:

    • £25,000 IHT on transferring the asset into trust
    • £6,000 IHT exit charge

    The total tax on transferring a £450,000 asset is £31,000. This is just 6.89% of the asset value.

    Please note that any additional transfers would be taxable without the £325,000 lifetime allowance as it has already been used up.

    There would be no IHT liabilities if the asset was worth less than the £325,000 IHT allowance, provided that no previous transfers had been made.

    CGT for the child on disposal of the asset

    Please be mindful that the above strategy is only deferring the CGT liability. The above example shows an asset transfer of £450,000 but because the father used holdover relief the deemed cost to the son is the original purchase price of £300,000.

    Remember that there are many ways of minimising CGT using a number of methods using a) Private Residency Relief PRR b) Enterprise Investment Schemes EIS and C) Incorporation relief (transferring assets into a limited company).

    3% SDLT surcharge considerations  

    Your child would have to pay the 3% SDLT surcharge if the child does not already have a home and you transfer the property to them out of trust. This is because they have more than one property as shown in our previous article

    It is therefore important that you plan ahead before using this strategy.

    Step by step guide to implement this strategy

    It is one thing to understand the theory but it is another to implement the above successfully. That is why we have created a step by step guide:

    1. Identify a property that has a value of less than £325,000 (which is below the IHT threshold). Anything above this value will be subject to IHT at 20% (if paid by the settlor)
    2. Transfer the property into a Trust (mortgage free) and calculate the IHT liability
    3. After three months of the trust being created transfer the property from the trust to the adult child and calculate the IHT exit charge
    4. Complete and submit the IHT100 form within 12 months of the said transfer
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    Simon Misiewicz | Business Development Manager

    Optimise Accountants

    Telephone: 0115 939 4606

    website: http://www.optimiseaccountants.co.uk


    Properties into trust and mortgages

    I have made provision for a trust in  my will when I pass

    I own a property investment company and I own all the shares

    The plan is all of my Shares go into the family trust and the Mortgages held by the company carry on as it did before I passed

    My personal owned BTL property also goes into trust but the Lenders will need to be changed

    I chatted yesterday with one of my Bankers and they have advised they can lend to a trust an

    I think Mortgage Debt can be a good thing for IHT planning

    I also write Life insurance in trust for my family so they have a choice to pay off my debts or just reorganise the debt


     

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    Learn Change and Adapt ?????