18:02 PM, 17th March 2023, About 12 months ago 2
If you’re confused by the title of this article; “Tax is triggered by the timing of events”, I will start with a simple example before moving on to explaining how “timing” can be used to your advantage with Landlord Tax Planning via Property118 and Cotswold Barristers.
Example One – Capital Gains Tax
This tax is only paid when you sell a property.
Until you sell, the tax trigger point has not occurred so no tax is due. To use a technical term, the tax has not yet been crystallised.
Almost all forms of transferring a property, even a gift at no value, is treated as a sale at market value for tax purposes. However, transfers between spouses occur at a notional value equal to the base cost at the date of purchase. This means there is no CGT payable on sales or transfers of assets between spouses.
If you don’t sell you don’t pay Capital Gains Tax, no matter how much the value of your assets appreciate.
Also, Capital Gains Tax is only applied if you sell a property whilst you are alive. Once you have died Capital Gains Tax ceases to apply.
Example two – Inheritance Tax
Inheritance tax is the value of your assets on death minus the value of your liabilities.
Until you die this tax isn’t payable, regardless of the value of your estate.
Unless you plan to leave the net value of your estate to your spouse it makes sense to use all means possible to accrue asset values outside your estate for inheritance tax planning purposes. Please note that there isn’t any inheritance tax payable on the transfer of your estate to your spouse.
Example three – using a combination of both of the above
Sometimes referred to as “Death Bed Tax Planning“, it can be beneficial to transfer all assets to a dying spouse. This is because Capital Gains is re-based at the time of death, which provides an opportunity for the surviving spouse to gift rental property assets to loved ones at that point, without Capital Gains Tax implications. If the remaining spouse survives for seven years there is no inheritance tax due on these gifts either.
Example four – accruing assets outside your estate
If your rental properties are in a Limited Company structure there is a lot more that can be done in terms of inheritance tax planning. For example, you could restructure the company to become a Family Investment Company, in which multiple classes of shares can be created. Some of these share classes can have a frozen value (Freezer Shares) and another share class to which growth of the business accrues (Growth Shares). By holding the ‘Growth Shares” outside of your estate they are not exposed to Inheritance Tax upon your death. Furthermore, if there is a shareholders agreement to specify when the ‘Growth Shares’ are crystallised, you might wish to hold Growth Shares in a Discretionary Trust. The Shareholders Agreement could stipulate that the Growth Shares have no value until the company is liquidated, sold or wound up. This means the 6% tax usually payable on the 10th anniversary on the value of an estate sitting in a Discretionary Trust is limited to the original face value of the growth shares (before any growth occurs) unless the company has been sold, liquidated or wound up. This may not occur for several generations.
The timing of tax trigger points is often the key to effective tax planning.