How can I minimise tax on my kids' property legacy?

29 July 2014

Q

My will is set up with my wife as tenants in common. Our house is mortgage free and worth £265,000. We intend to buy a flat worth £285,000 to live in and rent out our house at £1,350 a month. I would like to leave the two properties to my two children, to provide them with a monthly rental income for them to spend on our five grandchildren. My hope is that they will use the income to invest in property for the benefit of themselves but also our grandchildren. What would you recommend to safeguard their inheritance from inheritance tax? And how can I find a specialist IFA to advise me? My pension IFA did a superb job on setting up my pensions but I don't know if their experience covers this type of financial query.
From
NB/Kent

A

Many couples set up their properties as tenants in common, rather than joint tenancy, which effectively means they own a proportion (usually half) of the property each.

This allows them to pass their share of the property to somebody else, often their children, on the first death.

The most effective planning, from an inheritance tax perspective, could be to gift the rental property to your children or grandchildren, either directly or into trust. This should mean that any growth in the value of the property would be outside of your estate from day one and the current value would be outside after seven years.

Use of a trust would enable you to retain control over how, when and by whom the trust assets - property and rental income - are accessed.

However, in order for any transfer of asset to be effective from an inheritance tax perspective, the donor would also have to rescind the rental income. So if you're reliant on that income, you are very restricted in what you can achieve. While property is a very popular asset, it isn't the most flexible and so planning options can be limited.

If inheritance tax is a major consideration, there may be more scope for planning if you're investing in liquid assets. Alternatively, you could look at directing a proportion of the rental income to fund an insurance policy to cover any inheritance tax liability.

This is a complex area of financial planning with a number of pitfalls, not least that a surviving partner might lose control of their properties or in extreme circumstances even be forced out of their home.

It is therefore imperative that you take specialist legal and financial advice. When picking a financial adviser, make sure you select one who gives independent rather than restricted advice and ideally choose a highly qualified adviser such as a chartered financial planner or a certified financial planner.