Death Bed Tax Planning For Landlords

Death Bed Tax Planning For Landlords

10:14 AM, 21st September 2021, About a month ago 4

Text Size

None of us are immortal, so death bed tax planning strategies are important for us all to know about. On that basis I make no apology for what some might perceive to be such a taboo topic.

This Case Study is based on a married couple with children, which fits the profile of most but not all landlords.

Please bear in mind that Death Bed Tax Planning can, to some, appear counter intuitive.

Death Bed Tax Planning Case Study

Mr X has been diagnosed as terminally ill.

Mr & Mrs X own all of their property as Joint Tenants, which for income tax purposes means that rents are split equally.

For inheritance tax purposes, if they do nothing, when Mr X passes away, Mrs X will own 100% of the properties in accordance with their Will.

There is no inheritance tax between spouses.

Mrs X will be deemed to have inherited 50% of the value of the properties at the value of the death of Mr X.

If Mrs X then sells or gifts the properties, she will pay Capital Gains Tax on the 50% of value she has been deemed to have always owned.

How this scenario can be improved.

This is where the professional advice might appear counter intuitive.

Prior to the passing of Mr X, Mrs X should transfer her share of the properties to her husband.

There may well be some Stamp Duty Land Tax payable on the transfers, particularly if there are mortgages secured on the properties. However, there is no 3% additional rate Stamp Duty on consideration for transfers between spouses.

There is normally no requirement to refinance the properties at this point. a Declaration of Trust and Form 17 can be used.

The outcome.

When Mr X dies, Mrs X will inherit the full value of the properties at their value on the date of death of Mr X.

Mrs X will then be able to gift some or all of the rental properties to her children without Capital Gains Tax being applicable.

If Mrs x survives the gift for three year then it will reduce the value of her estate in steps until the end of the seventh year, after which the gift will not form part of her estate for inheritance tax purposes at all.

The above strategy could also be used to wash out capital gains at the point of incorporation post death of Mr X, without the need for ‘incorporation relief’ being applied.

Book a Tax Planning Consultation

  • Please provide an overview of your circumstances and what you are looking to achieve.
  • Landlord Tax Planning Consultancy is the core business activity of Property118 Limited (in association with Cotswold Barristers).


Comments

by Tim Rogers

20:42 PM, 21st September 2021, About a month ago

My brain cell was following this fairy well until your last statement.

"The above strategy could also be used to wash out capital gains at the point of incorporation post death of Mr X, without the need for ‘incorporation relief’ being applied."

I think you're suggesting that as Mrs X effectively becomes the new owner of 100% of the properties after MrX demise, if she incorporates quickly then CGT will not have had time to accrue sufficiently to matter?

Having acted as Executor recently I am acutely aware that probate can take many months to be granted. Can you incorporate before probate is granted?

A little food for thought......
There are the rumours of the chancellors intentions concerning CGT at death, if these materialise the nil CGT band may go.
There are also his possible IHT changes to bring it inline with income tax.
As husband and wife are treated as separate entities for tax purposes, some element of IHT between spouses may be introduced.

by Mark Alexander

23:21 PM, 21st September 2021, About a month ago

Reply to the comment left by Tim Rogers at 21/09/2021 - 20:42
I concur. That’s why it’s so important to keep up to date and to seize opportunities before the rules are changed.

by Tim Rogers

8:53 AM, 22nd September 2021, About a month ago

Hmmmm......
Seizing the opportunity to allow my wife to take advantage of the nil CGT rate now, a little extreme perhaps....lol?

by Mark Alexander

9:43 AM, 22nd September 2021, About a month ago

Reply to the comment left by Tim Rogers at 22/09/2021 - 08:53
LOL, maybe, but just think about how much tax you could save!

Just kidding! 😂


Leave Comments

Please Log-In OR Become a member to reply to comments or subscribe to new comment notifications.

Forgotten your password?

BECOME A MEMBER