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.
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.
Mrs X will be deemed to have inherited 50% of the value of the properties at the value of the death of Mr X.
There is no inheritance tax between spouses.
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.
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.