Buy-to-let landlords with property assets held in a company could be taking advantage of the current dip in house prices to plan for succession and mitigate their exposure to inheritance tax (“IHT”).
The UK rate of IHT is 40% and property investment businesses do not generally qualify for relief from IHT, so the full value of shares in a property company is usually exposed to IHT on death. This can result in the family’s enduring wealth being substantially eroded.
A larger number of property portfolios have come within the scope of IHT over the past decade, and for larger portfolios, exposures have increased. The nil rate band at which IHT becomes payable has remained frozen at £325,000 since April 2009, but average house prices in the UK have risen by 85% over a similar period, according to the Land Registry UK House Price Index.
Over this same time, prices have increased by more than 100% in the South East, and nearly 115% in Greater London.
Where property portfolios are held in a company, funds often need to be sourced separately to pay any tax charges. Further tax charges will arise if this is by taking dividends or, in worst cases, the company may need to be liquidated. Opportunities for simple lifetime planning are also limited: capital gains tax charges will arise in respect of most gifts of shares in a property company, and some IHT will usually become immediately payable if more than £325,000 of value is transferred into trust. These tax charges will often be prohibitively high. IHT planning for property businesses therefore often focuses on preventing exposures from increasing, rather than reducing existing exposures.
More recently, property prices have been falling, but many investors believe they could recover quickly. There are various restructuring tools that can be used to lock in a current valuation and, with house prices presently depressed, there is a window of opportunity to plan to achieve this outcome.
In some cases, relatively straightforward strategies like freezer/growth shares can help to freeze current value, allowing for capital growth to be transferred to the next generation of the family.
For business owners with larger portfolios who are open to the prospect of transferring ownership of the business during their lifetime, other forms of corporate reorganisation can also work effectively to limit the extent of value accumulating in their estate.
For example, the restructuring principles routinely applied in conventional corporate transactions, buyouts and succession planning can also be applied to property investment companies.
These provide a framework and mechanisms for a succeeding generation of shareholders to acquire the shares, whilst also allowing for the existing shareholders to realise and ‘lock in’ the current value of their shares. This can potentially be achieved without any significant immediate tax charges, and in a way that provides financial security for all parties, as well as flexibility and other options for lifetime planning.
A number of restructuring tools can also be flexibly combined with trust arrangements to provide for more dynamic succession of wealth, some degree of ongoing influence, and wealth protection.
Inheritance tax planning for property businesses is a complex area, and there are often various options to consider, with varying degrees of effectiveness and cost. These are most effective when values are low.
Whilst the current dip in property prices is concerning from a commercial perspective, it could present a potentially unique opportunity for property investors to plan ahead to mitigate IHT exposures.
* Peter Mills is a tax director at accountancy firm Menzies LLP *
