Tax Planning For UK Resident Individuals

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Capital Gains Tax Deferral / Mitigation

Owning a UK property portfolio can be an ideal way to plan for retirement. However, unlike qualifying pension plans, there are no tax reliefs available, and rental profit is taxed at marginal tax rates (the highest being 45% depending on income); and any future uplift in value (capital growth) is subject to capital gains tax (28%) when the properties are sold.

Consider the example of a MR and MRS X owning a property portfolio valued at £750k, which has been held for some years and was purchased for a total of £250k. We will assume there is no debt as this has been repaid over the years.

Issues

Currently there is an Inheritance Tax (IHT) exposure of £750k x 40% = £300,000.

If the couple were to sell the assets or pass the portfolio on to their children, then a capital gain would be triggered and the tax liability £500k x 28% = £140,000 would be payable.

There is a technique that can help.

With careful planning, MR and MRS X could obtain a base cost uplift for the properties, meaning that these could be sold without incurring the capital gains tax liability of £140,000.

Like most things in tax, this is a complicated area of legislation which, if implemented incorrectly, will incur substantial tax charges, including Stamp Duty Land Tax of £750k x 4% = £30,000.

Also, this one transaction alone does not help with the IHT exposure, and further steps will be required to minimise the future IHT charges.

What are the advantages?

Once owned by the company, the rental profit is taxed at corporate rates. Currently the main rate of corporation tax is 20%.

Should the properties be sold by the LTDCO, then only the gain from the date of transfer to the date of sale is subject to tax, i.e., the growth value from when the properties were transferred to the company.

Further ‘freezer share’ planning can be implemented in order to reduce the IHT exposure on future value from 40% in the estate of MR AND MRS X to nil.

Possible Alternative Planning

There is a technique that would allow the properties to be passed to the children absolutely without triggering the capital gains tax charge of £140,000.

This alternative technique involves absolute transfers of the properties with no possibility of benefitting from the capital or rental income, but does reduce MR AND MRS X IHT estate by the full value of £750k.

This post is intended for guidance only, and professional advice should be obtained before acting on any information contained herein. Smith & Brown Accountants cannot accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication.

Pointers

  • Rental profit from a UK property portfolio is taxed at marginal rates, up to 45 per cent
  • Any future increase in the value of the properties is subject to capital gains tax at 28 per cent when they are sold
  • If you plan to pass on the portfolio to your children, it would be subject to inheritance tax of 40 per cent
  • There are methods that can be used to obtain a base cost uplift for the properties, meaning they could be sold without incurring the capital gains tax
  • Further steps would still be required here to mitigate inheritance tax
  • If the properties were transferred to a limited company, the rental profit would be taxed at the corporate rate of 20 per cent
  • If the properties are sold by the limited company, then only the increase in value from the date they were transferred to the company to the date of sale is subject to capital gains tax
  • Further ‘freezer share’ planning can be implemented to reduce the inheritance tax liability on the future value of the properties from 40 per cent to nil
  • There is also a technique that would allow the properties to be passed to children without triggering the capital gains tax charge
  • This alternative technique involves absolute transfers of the properties with no possibility of benefitting from the capital or rental income

Apr 14, 2015