One way to avoid an IHT bill on a second property

18/08/2008

Wealth management lawyers, Moore Blatch, is advising clients worried about a 40% IHT bill on their holiday homes to consider giving them away now and paying rent to their heirs to use them.

 

There are an estimated 350,000 second homes in England alone and an estimated 260,000 people own homes abroad. Most second home owners tend to be more mature with many in their 60s, 70s and older. Many will have the whole of their combined IHT limit - £624,000 for a married couple, wiped out by their primary UK home and therefore their second property will be hit by 40% IHT.

 

However, their liability could be eradicated if they gave their home to their beneficiaries now and paid the commercial rent to use it. 

Subject to living seven years, the whole of the IHT is saved. The only tax that could be paid is income tax by the beneficiaries on the rent paid for the time that the property is occupied which is often just a few weeks or months a year.

 

For example: assuming a £300,000 property the IHT bill is £120,000 – however if it were rented for three months per year at 5% rental income the Income Tax bill after 10 years would be just £15,000 assuming it was paid by a higher rate tax payer – a saving of £105,000. If the beneficiaries were non tax payers the saving would be £120,000.

 

How best to give your holiday home away, but still remain entitled to use it:

 

Place the home in a trust

Pay commercial rent to the trust for the weeks that you use it

 

The rent paid to the trustees can be used to discharge the running costs of the property and any surplus can be distributed to the beneficiaries.

 

Andy Kirby, Senior Tax & Trusts Manager, Moore Blatch solicitors,

commented: “Property is notoriously hard to give away for the purposes of IHT planning as it is a single asset that is difficult to give away piecemeal. However, by setting up a suitable trust, all the IHT can be saved (subject to 7 years survival) and there is no pre owned asset tax as a rent is paid for the use of the asset. The rental income stays with the beneficiaries so the tax-man’s cut is effectively wiped out.”

 

 

 

 

Please note, this advice comes from Moore Blatch solicitors, not Mature Times. You are advised to take independent financial and legal advice before undertaking any changes in your asset portfolio.