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Louise and her property tax specialists recently wrote an article that I thought would be a useful read.
===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:
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:
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:
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.
Simon Misiewicz | Business Development Manager
Telephone: 0115 939 4606
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
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?
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.
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.
You would transfer BTL properties into a trust and back to your adult child for the following reasons:
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.
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.
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.
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:
We are now able to calculate the exit charge rate as follows:
As you can see that the total IHT liability on transferring an asset of £450,000 into trust is:
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.
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).
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.
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:
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