Category Archives: Property

Inheritance tax & houses – common errors

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General election time tends to cause a spike in views being expressed on IHT and houses. By a combination of lack of awareness, the complex tax system, and sometimes political intent, common errors arise.

Some examples from the December 2019 (now with some 2022 updates) election campaign are:

  • Not realising that only around 5% of death estates suffer IHT each year – see https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/832126/IHT_Commentary.pdf
  • Not being aware that the residence nil rate band can increase the normal £325k nil rate band by £150k* (now £175k) – see https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band
  • Thinking IHT is double tax, rather than often being partly or mainly the result of otherwise tax free growth (or not much worse “double tax” than VAT)
  • Hoping that giving away all or part of the house saves IHT – in many cases it makes things worse, due to reservation of benefit, pre-owned asset tax and loss of capital gains tax free uplift
  • Forgetting the instalment option – see https://www.gov.uk/paying-inheritance-tax/yearly-instalments
  • Worrying, when young and healthy enough that life cover can cheaply cover the IHT risk
  • Forgetting the transferable nil rate band – see https://www.gov.uk/guidance/inheritance-tax-transfer-of-threshold
  • Focusing on “40%”, rather than what actual blended tax rate might apply – eg the estate of a married couple (or widow/widower) with £1.2m house might suffer 8.3% (now 8%) IHT on that asset
  • Not realising that a reduction in the IHT rate, or its abolishment, might be balanced by the removal of the tax free uplift on death or private residence relief (given much wealth is otherwise untaxed property gain)
  • In hoping for IHT to be replaced with something else, that an annual wealth tax might cause more hardship than IHT on an elderly low income and valuable house owning taxpayer
  • Worrying about IHT but not taking advice

If any others are spotted, I am happy to add to the above list.

Some additions:

  • Even if IHT is payable on the house, there may be other resources to draw upon, such as the deceased’s pension fund
  • In some circumstances, where more than one generation live in the family home, it is possible to gift and share part of the property with the younger generation without it being a reservation of benefit – see https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14360

*it is this residence nil rate band that Labour’s 2019 manifesto suggests should be removed, leaving just £325k (but not £125k as some suggest, which is from an earlier report commissioned, but not written, by Labour).

Buy to let – using a company may not be the answer

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One of those situations where the question asked appears to contain the answer:

“I need a company for my buy to let portfolio – can you help me do that?”

It’s a common question at the moment.

Why a company? The restrictions to interest relief for individuals is the main driver, especially where the change pushes a basic rate taxpayer into higher or additional rate tax. Many with high rents covered by high debt don’t appreciate the impact this will have on their tax position.

Capital gains tax problems? Where properties stand at a gain, transferring these to a company may trigger tax. Although incorporation relief is available, property rental may not qualify. A taxpayer won on this issue (see this case) but on specific facts that will not apply to many landlords. If the properties are not standing at a gain, or just a small gain, this problem goes away.

Banking? some promote the idea of a beneficial trust company, in an attempt to use a company without telling the bank (see this article) but that would be foolish. An early discussion with the bank to get them onside with holding debt in a company is essential – it increases their risk and they may say “no” or increase their charges and interest.

What about SDLT? a transfer to a company usually will trigger Stamp Duty Land Tax. There is a relief for partnerships but two problems arise: have you really got a partnership (rather than just joint ownership) and have you put a partnership in place to avoid SDLT (in which case anti-avoidance rules probably catch it)?

Future how will you extract profits? Is there a double layer of tax on sales? What future changes to tax or company law could put you in a worse position? Will buy to let companies be targeted by anti-avoidance legislation? Will collapsing (liquidating) the company if things change cause additional taxes?

Overall there is a strong hint that the Treasury and Bank of England wish to discourage smaller buy to let landlords, to protect against a property crash, so any planning may be targeted by future legislative changes.

An outline plan

  1. work out your tax impact of the interest relief changes;
  2. consider if you need to adjust your debt, even if that means selling some property;
  3. speak to a financial adviser on commercial property (which tends to have a better tax treatment), indirect property investment, asset diversification, ISAs and pensions (ie generally, what exposure should you have in a balanced porfolio to debt funded residential property?);
  4. if an adviser says that you should qualify for incorporation or SDLT reliefs, do they mean will qualify? Are they or you taking that tax risk if HMRC challenge and win? (Beware the “we have Counsel’s opinion” line – to me that indicates they see risk, not safety.);
  5. Don’t pretend to be more actively involved than you are in reality in order to get incorporation relief and don’t set up a partnership just to avoid SDLT;
  6. Consider a company for new acquisitions;
  7. Consider a transfer of the existing property and debt to a company, if you are satisfied that it can be done with low or no tax and the bank are happy to do so;
  8. Work out the costs and administration of having a company;
  9. Expect future attacks on buy to let property.

 

Holiday home sale – is the profit in £ or €?

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A common cause of confusion for UK residents when selling a foreign holiday home is the UK tax treatment of the gain, especially where there doesn’t appear to be a profit.

Currency gains

For example, a Spanish holiday home is purchased for €250,000 and sold a few years later, also for €250,000. There is no gain in Euros but there may be gain (or loss) in Sterling. That is because the cost and proceeds are converted into Sterling on the respective acquisition and sale dates, so currency fluctuations will cause a UK tax issue.

The case law on this point can be found in a 1981 case Bentley v Pike and, from 1993, Capcount Trading v Evans. HMRC’s view can be found here.

Foreign taxes

Other points to remember are local and foreign taxes, including withholding taxes on the proceeds. Double tax relief usually is available to offset foreign tax against the UK tax. Further care is required if the property is held in a structure, such as a UK or overseas company (or trust), as the tax position can be unexpectedly complex and penal.

Foreign advice

It is important that foreign tax and legal advice is taken – for example, having a Spanish will for Spanish assets, to prevent the forced heirship rules applying.

For US, French and Spanish property, I have links to UK advisers who can advise on the foreign tax position. That can be better than relying on a local adviser, who may not have a working knowledge of the UK rules.

What do HMRC know about foreign assets?

Finally, with the common reporting standards automatic exchange of information between most countries’ tax authorities (being phased in between 2015 and 2018), HMRC has access to foreign ownership details, which will trigger more enquires into such properties to identify undisclosed income and gains.