Gardner Leader

Property ownership can be very ‘Taxing’!

August 2007

Property ownership has proved a sound investment over the years for the people of West Berkshire and beyond. However, it creates a potential tax problem. Jo Barton, the partner in charge of private client matters at Gardner Leader Solicitors, provides an insight into how to limit tax exposure in the light of increased property values. Here, he lets us in on a typical client discussion on the matter:

Client: I own my home jointly with my husband which is worth about £600,000. I also have a house down in Devon and we are thinking of helping our daughter onto the property ladder by providing some funds for her. What are the issues we should be aware of?

Jo Barton: Let’s start with your main home. Are you joint tenants or tenants in common?

C: We’re not tenants at all, we own it outright!

JB: Yes I know, but as joint owners you will share the property in one of two different ways. If you are joint tenants, the property passes automatically to the survivor on death notwithstanding the terms of any Will, whereas if you are tenants in common your respective shares (normally half each but not necessarily) fall within your estate and pass by Will.

The advantage of being tenants in common is that, if a share of the value of the home passes under the Will, it can be used to save Inheritance Tax (IHT) which would otherwise be payable on the entire value of the property when the survivor dies. We need to make sure you are tenants in common and review your Wills to include a gift of the IHT nil rate band (which is £300,000 this year) to be held on a special trust for the survivor and your children. The trustees can be given the power to hold a charge over the property as an asset of the trust, equivalent to half its value at the date of the first death, so the surviving spouse can still own it outright subject to the charge. As IHT is at 40% it could save your children £120,000 so it must be worth it. And we know the band is rising to £350,000 over the next 4 years so the saving will increase with each passing year.

C: Good – please make sure we are tenants in common! But wasn’t there a case recently which shed some doubt on such trusts?

JB: Yes, the Phizackerley case. The papers made a big thing of it but without going into detail you have no need to worry. Nil rate band trusts and Charge schemes in Wills remain as effective as ever. Now what about the place in Devon?

C: We bought it for £90,000 10 years ago but it’s probably worth £300,000 by now. It’s in my sole name to save on income tax on the rent. Should I give it away to the children now to save them IHT?

JB: You could and as long as you survive the gift by 7 years, IHT would not be payable on the value of the property. But the gift will be a disposal on which Capital Gains Tax (CGT) is payable. This is charged at up to 40% in the growth in value though non-business asset taper relief over 10 years would reduce this to a tax rate of 24%.

C: Oh dear. Is there anything I can do to avoid this?

JB: Yes, a few things. Gifts between spouses are not subject to CGT so you could reduce the CGT by putting the house into joint names and setting off both your personal allowances (£9,200 each this year). If you were to live there for a short while before making the gift, you could claim it as your principle private residence and get 3 years’ growth free of CGT. And if you let out the property you may qualify for lettings relief of up to £40,000 per owner. But you will also have to pay rent to your children if you use it as otherwise you will have reserved a benefit which will mean IHT still has to be paid.

C: Would it make any difference if it were a holiday let?

JB: Yes holiday lets get business asset taper relief which reduces the CGT to 10%. But the house would have to be let furnished and be available for at least 140 days a year and let for at least 70 at a market rent.

C: What do you think about our proposed gift to our daughter?

JB: Well if it’s a cash gift there are no CGT issues and if you survive the gift by 7 years the money is out of your estate for IHT so that would be good news.

C: I have a feeling there is a ‘but’ coming here!

JB: I’m afraid so! I call it the 3 Ds. Death, Divorce and Debt! Be sure that your daughter does not run into any of these which could result in your generous gift disappearing! If in doubt, consider making a loan rather than a gift or provide the funds as an investment in the property in which you retain an interest. This can be secured by a simple trust if you don’t want your name on the mortgage. But to be an effective gift for IHT there must be no strings attached and thanks to complex rules about ‘Pre-Owned Assets’ you must never live in the property either if you provided some of the purchase money or an income tax charge will arise.

C: Well thank you for your time. How much do I owe you?

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