Inheritance tax and legacy planning for property company owners

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As the value of the rental properties within your property company increase, so does the value of your shares and hence the value of your personal estate for inheritance tax purposes.

You may have considered gifting shares, but that could have CGT implications and what if the person you make the gift to then gets divorced or becomes insolvent?

The solution to this problem is to create a new class of shares with minimal initial value and no automatic voting or dividend rights, then to gift these shares to a discretionary trust, for the benefit of your loved ones and their bloodline only. The company then changes its rules so that all future growth accrues to the new class of shares, outside of your estate.

A formal ‘letter of wishes’,  provides rules for trustees of the discretionary trust to follow. This is drafted in such a way so as to ensure that only your nominated beneficiaries and their bloodline can benefit from the trust. Also, and very importantly, the value of the trust is only ever distributed in the form of loans to beneficiaries, repayable on their death. These loans, whilst they are outstanding, also accrue interest at 2% per annum so that the value of assets keeps pace with the Bank of England annual inflation targets.

A practical example

One of your beneficiaries gets married and wants to buy a house. The trustees agree to make a loan of say £500,000 to help with this. Your beneficiary and spouse then have children. However, after a few years the couple decide to get divorced. The spouse wants half of the value of the house, which the Courts may well agree should be the case, but the debt to the trust, plus accrued interest, needs to be factored into the settlement figure.

Years later the beneficiary dies and his/her assets are valued for probate purposes. Yet again, the debt to the trust needs to be factored into the net value of the estate, not forgetting the accrued interest of course. This serves as financial salvation to their bloodline!

Landlord Tax Planning Consultancy is the core business activity of Property118 Limited (in association with Cotswold Barristers).

Professional advice from a qualified Barrister-At-Law, insured up to £10,00,000 per claim.

With a ‘Smart Property Company structure’ you could:

  1. Offset all finance costs as an expense against rental income
  2. Attribute some or all future growth in the value your property investments for the benefit of future generations, thus avoiding inheritance tax at 40%
  3. Pay just 19% corporation tax on profits
  4. Extract your investment capital from your property portfolio without having to pay personal income tax
  5. Reduce the value of your estate for inheritance tax purposes

If your strategy is to acquire further investment properties within a Limited Company structure, please do not settle for an “ordinary shares” structure.

The existence of ordinary shares is often a clear sign of there having been no thought given to tax planning whatsoever. If you or your accountant purchased your company ‘off-the-shelf’ and then did nothing to modify the share structure or the rules of the company (Memorandum and Articles of Association) then you are probably missing one or more very lucrative tax planning opportunities.

Surveys of buy-to-let mortgage brokers and lenders over the last few years have revealed that up to 85% of all new buy-to-let mortgages applications are from Limited Companies.  The Property118 tax team has reported that more than 90% of these companies have made no modifications to their ordinary share structures whatsoever.

Ordinarily, shareholders in a company own just one type of shares, called ‘ordinary’ shares. These have:

  • Voting rights
  • Dividend rights
  • All capital appreciation attributed

However, it is possible to create multiple classes of shares so that differing levels of dividends can be declared to shareholders. From a tax planning perspective, this can be useful for a family business where the shareholders have different levels of income from other sources. Likewise, it is possible to create a class of shares that initially have a nominal initial value, because they have no voting rights, no capital value and no automatic rights to receive dividends. This class of shares is ideal for inheritance tax planning because future growth in the value of the business can be attributed to them, and they can be gifted without tax implications whilst their value is negligible.

The Property118 tax team have put a label on this form of tax planning – “SMART Property Company structuring”.

The good news is that it is never too late, even if you already have an ‘ordinary’ property share company structure. It can be modified.

Likewise, if you have been considering the formation of a property company for your future investment acquisitions, please don’t settle for an ordinary ‘off-the-shelf’ property company. A cheap set up could end up costing you dearly in the longer term. Get your foundations right before you start building!

Just tell us about your future property investment aspirations by completing the form below and we will be happy to provide you more information about what is possible and even arrange a ‘one-to-one’ recorded video consultation with one of our landlord tax planning consultants.

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  • For the avoidance of doubt, we are able to assist landlords who own properties in England, Northern Ireland, Scotland and Wales. Where you reside is not a problem, even if you are resident outside the UK.
  • Landlord Tax Planning Consultancy is the core business activity of Property118 Limited (in association with Cotswold Barristers).

Landlord Tax Planning Consultancy is the core business activity of Property118 Limited (in association with Cotswold Barristers).

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