Inheritance Tax

Any property assets held by an individual will be liable to 40% Inheritance Tax on anything over a threshold of 263,000 pounds. Therefore, if you have property worth 500,000 pounds, on your departing your offspring will be liable to pay a bill of about 95,000 pounds.

This would lead most families to having to sell the property within a certain time window, pay bills and then split the proceeds consistent with a Will if there was one. An exception is if the owner was to be survived by a spouse and the property is in their joint names. If this was the case, there is no Inheritance Tax bill until the spouse departs.

Some families have chosen to set up Trusts for high value properties whereby the value of the property is gifted to their offspring, and the parents make rental payments to the offspring – up until recently, if the parents were to survive for 7 years after the Trust was set up, this reduced their Inheritance Tax Liability to zero.

This loop-hole has recently been closed in that the Chancellor has announced that such Trusts on a retrospective basis going back decades have until April 2005 to unscramble them or they will have to pay income tax on a proper market rate rental for such property. The appropriate market rental rate would likely have to be proved to be appropriate and objective probably going back many years for such Trusts.

This is an example of retrospective taxation – something some commentators see as a new precedent – because of this change, there could be other such changes for property taxes and trusts in the future - this does create an increased sense of fiscal uncertainty amongst some investors. This has to be borne in mind when investing – that negative tax changes can affect your portfolio – and indeed the market price for property in the future. On the positive side, the recent announcement of Personal Investment Funds is likely a positive development for property taxation which could offset the negative impact of the above change for some people.

Note that if you were to pass on and leave a portfolio of highly geared properties with a high Inheritance Tax burden, there could be cases where some properties might have larger Inheritance Tax liability than equity, in a similar way to the Capital Gains Tax example shown above. The last thing you need is to leave your offspring with either not being able to afford to sell the properties because of the tax burden, or having to sell the lot in a “fire-sale” because of the tax liabilities. Proper tax planning and financial gearing using a reputable professional is very important.

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