Getting at the cash in your buy-to-let

[Worldlife]

A couple of points from this article in The Sunday Times - Money - October 29th 2006 (http://business.timesonline.co.uk/article/0,,8214-2426232,00.html)

The leasehold of an investment property for the benefit of the family is held by my wife, my daughter and myself. Our daughter however is excluded from the freehold that is jointly owned by ourselves and the leaseholder of the only other flat in the building.

From the Sunday Times article:-


A higher-rate taxpayer who has made a £100,000 gain on a £250,000 holiday home over five years would face a CGT bill of £31,000 if it was sold in his or her lifetime.

However, New Life’s scheme takes advantage of the Revenue rule that profits are revalued at death. When people die and leave their belongings to their family, or indeed anyone else, there is no CGT to pay at the time. When the property is eventually sold, CGT is based on the difference between the proceeds of the sale and the market value at the time of death.

The higher-rate taxpayer above could pass the entire £250,000 property to his or her family CGT-free. A year later the family might sell it for £260,000 and would be assumed to have made a gain of only £10,000 — making the tax bill just £480. They would have to pay inheritance tax (IHT) on the value of the estate above £285,000.

The Sunday Times article is in connection with remortgaging to release equity but this point may be of concern:-


There are early-repayment charges if you repay the loan in the first five years voluntarily. The loan must be repaid within 12 months if you are forced to move into long-term care or die, but then the early-repayment charges are waived.

Am I correct in believing the following to be correct:-

There will be no capital gains tax to pay when either of the three joint owners of the leasehold die.

There will be no inheritance tax to pay if the husband or wife die first

There could be a liability for inheritance tax if the daughter predeceases her parents. Would the value of a part of a property for inheritance tax purposes be less than one-third of the market value of the whole property?

Even more important than capital gains tax or inheritance tax is whether or not Social Services can access the equity in this rented accommodation to fund residential or nursing home care should this be needed. Could their claim be restricted to one third of the rental income (less outgoings) as the two other joint owners would not wish to sell in these circumstances.

[Tax Accountant]

A couple of points from this article in The Sunday Times - Money - October 29th 2006 (http://business.timesonline.co.uk/article/0,,8214-2426232,00.html)

The leasehold of an investment property for the benefit of the family is held by my wife, my daughter and myself. Our daughter however is excluded from the freehold that is jointly owned by ourselves and the leaseholder of the only other flat in the building.

The Sunday Times article is in connection with remortgaging to release equity but this point may be of concern:-

Am I correct in believing the following to be correct:-

There will be no capital gains tax to pay when either of the three joint owners of the leasehold die.

Yes, there is no Capital Gains at death on any asset that the deceased has left behind. Instead, one has to look at the Inheritance Tax on the net value of the estate of the deceased. In your case, you are only looking at the share of the asset owned by the deceased and not the shares owned by the others.


There will be no inheritance tax to pay if the husband or wife die first

Not if the deceased's share of the leasehold/freehold is left to the surviving spouse.

But this will get added to the assets of the surviving spouse and will eventually get caught in the IHT net when he/she dies.

There could be a liability for inheritance tax if the daughter predeceases her parents.

Would the value of a part of a property for inheritance tax purposes be less than one-third of the market value of the whole property?

Generally, yes. The value is discounted by a certain percentage to take account of the fact that the daughter's share is not only a joint property but also a minority holding and not easily sold in the open market to an outsider.

Even more important than capital gains tax or inheritance tax is whether or not Social Services can access the equity in this rented accommodation to fund residential or nursing home care should this be needed. Could their claim be restricted to one third of the rental income (less outgoings) as the two other joint owners would not wish to sell in these circumstances.

Not my field, but I believe that Social Services would take a charge over the property and/or force a sale.




See replies above in red.

Ramnik

[Worldlife]

Thanks Ramnik.... very reassuring. Looks as if our long term planning is on target.

Suppose if the worse happens we should plan to move to Scotland where believe there is no seizure of assets to pay for residential or nursing home care - or perhaps opt for euthanasia or suicide!!!

[Tax Accountant]

Thanks Ramnik.... very reassuring. Looks as if our long term planning is on target.

Suppose if the worse happens we should plan to move to Scotland where believe there is no seizure of assets to pay for residential or nursing home care - or perhaps opt for euthanasia or suicide!!!

You need to make sure that you have adequate IHT planning in place. The basic point is that everyone should at least use up the Nil rate band which is presently £285,000. Therefore, a married person should never leave all his/her estate to the surviving spouse.

Ramnik

[Worldlife]

You need to make sure that you have adequate IHT planning in place. The basic point is that everyone should at least use up the Nil rate band which is presently £285,000. Therefore, a married person should never leave all his/her estate to the surviving spouse.

Ramnik

If properties are jointly owned then I believe I am correct in understanding that only a proportion of the value of that property will be transferred to the survivor i.e. only part of the 'estate' will be passed to the survivor?

Would I also be correct in thinking that IHT problems will only arise on the death of the first partner if the value of property exceeds £570,000?

My feeling is the biggest inroads against capital could be by seizure of assets by Social Services. We protected against this by the family holding their parents property in trust and on terms and conditions fair to both parties. The parents granted an interest only mortgage to the Trustees (one of whom also had enduring power of attorney that sadly eventually had to be registered).

Social Services were quite happy to accept the mortgage interest payments from the Trustees as the contribution of the person in care towards their care costs. The property did not have to be sold and the Trustees continued to enjoy the capital growth from the property and comply with the intent of the parents who expressly wanted their property to be passed to the family.

Just to underline that IMHO and experience that for property protection in England and Wales capital gains tax and inheritance tax considerations could be secondary to setting up protective trusts.

The situation is I believe different in Scotland - hence my comments

[Tax Accountant]

Without replying to your specific comments, I would only add that all the assets, or share of the assets, belonging to the deceased would be taken into account in IHT calculations and not only the investment property.

Ramnik

[Worldlife]

Without replying to your specific comments, I would only add that all the assets, or share of the assets, belonging to the deceased would be taken into account in IHT calculations and not only the investment property.

Ramnik

So my original point should be amended by adding and his or her share of all other assets


by Worldlife Would I also be correct in thinking that IHT problems will only arise on the death of the first partner if the value of property and his or her share of all other assets exceeds £570,000?

[Tax Accountant]

So my original point should be amended by adding and his or her share of all other assets

The nil rate band for IHT is £285,000 as far as transfers to persons other than a spouse is concerned.

There is no limit to the amount left to the surviving spouse.

Ramnik

[sober]

So my original point should be amended by adding and his or her share of all other assets
Quote:
by Worldlife Would I also be correct in thinking that IHT problems will only arise on the death of the first partner if the value of property and his or her share of all other assets exceeds £570,000?



I would have thought it is the SECOND parent's death that will give rise to IHT if his or her share of all assets exceeds 285K (at the time of second parent's death).

The first parent to die can easily leave in his/her WILL upto nill rate band to the children and the remainder to the surviving spouse - in which case he/she can have assests in excess of 570K and still have no issue with IHT.

Regards
Sober

[Worldlife]

Thanks to both Ramnik and Sober for resolving the IHT issues here so clearly.

My main concern though is to set up the estate in best possible way to ensure that property does not have to be sold to pay for residential or nursing home care .

What we did in the past was to buy the property from the owner occupier with a mortgage granted by that owner occupier to a family trust. The trust did not have to pay mortgage interest until such time as the original owner occupier died or no longer needed the property for his/her occupation.

It was possible for the family trust or members of the family to make gifts to the owner occupier.

This structure was set up and encounters with Social Services under this scheme were about a decade ago.

In this case the income and assets of the former owner occupier were assessed by State and Social Services being confined to the interest from the mortgage to the trust that was fixed at fairly low rate.

The capital gains on the property during the period of long term care substantially exceeded the contributions paid in interest against the mortgage.

On the death of the owner occupier all the family Executors had to do was to repay the mortgage into the estate of the deceased where the family were the principal beneficiaries of the will.

Think there would now be more problems on capital gains tax issues (blind trust?) and wonder how this concept should be modified.

To me it is iniquitous that having paid taxes and NI over a working lifetime and enjoying reasonable health that at a point where one might need help one now has to pay for it.

After all the entire concept of the NHS was to provide free care at the point of need. The contract we signed up to was to ensure that there was overall protection and care based on the principal that regardless of wealth one was unaffected financially by the lottery of life in respect of ill health issues.

The goalposts have been moved and the cricketers have surreptiously taken over the football club!!!!!