A Good Time For IHT Planning On Buy To Let Properties?

Mon Jan 12

One of the more intractable tax planning problems is dealing with inheritance tax planning on buy to let properties. Business property relief from inheritance tax has never been available for buy to lets. The spouse exemption applies of course but what about IHT on the surviving spouse’s death? You can give assets away to another individual, usually a child, but then you run into capital gains tax calculated on the basis that the disposal proceeds are at the current market value of the property, and if a mortgage is in place, SDLT on the value of the mortgage. Having said that, if you bought in the last 5 years, then a capital gain on the property is likely to be small, if indeed there is a gain after adding in SDLT on acquisition.

CGT and SDLT are the bane of IHT planning in this area.

Some might argue that incorporation relief, where assets are transferred to a company and the gain on the properties is held over into the shares of the company, offers a way out following the Ramsay¹ case. One could then look at “family company” or as I call them “companies”, planning but HMRC’s position is that the facts of Ramsay are far removed from your average buy to let.

So how do you mitigate IHT on a buy to let portfolio?

There are ways of achieving this, aimed purely at IHT mitigation, although other add-ons for other purposes can be included. But in short, the plan would be to move the value into another type of asset, but without triggering CGT or SDLT.

In practice the major obstacle is the mortgage lender who will have no incentive to co-operate and run any risk with its nice safe and secure lending, so any planning realistically should be done when you wish to refinance, for example when you have a fixed rate expiring, or perhaps, you can get a better deal combining your mortgages with one lender rather than playing the field.

There are rules to follow, and all planning is dependent upon successful implementation, not just on day one but for every year the planning structure is in existence, which also comes with costs, such as accounts and tax returns.

However, if you are sitting on a sizeable portfolio, especially one which needs refinancing, perhaps now is the time to think about some IHT planning?