Charles Hutton explains how the credit crunch's deleterious impact on property prices and stockmarkets can be turned into a benefit by judicious tax planning
The turmoil in the financial markets over the last year or so - and particularly over the last couple of months - added to falls in the housing market, will have significantly reduced the value of many people's estates. But what is a time of concern for many might also be an opportunity for some - and not just for picking up bargains. In terms of tax planning, there are potentially significant advantages in taking action while values are low, especially for those able and prepared to take a long-term view. Here are some ideas for consideration.
Low value gifts
Assets given away within the preceding seven years are of course taken into account for inheritance tax (IHT) purposes on death. The value taken into account is the value at the date of the gift; any increase in value between the gift and the death is immediately free of IHT.
So, if Andrew gives an investment property now worth £400,000 to his children and then dies in five years' time when it has increased in value to £500,000, the value for IHT is capped at £400,000. The £100,000 of growth is protected even though he dies during the seven-year period. This amounts to a saving of £40,000.
But what if the bottom of the market has not yet been reached and the property has gone down in value to £350,000 by the time he dies five years later? In fact his family would be no worse off because a special rule allows the lower value of £350,000 to be substituted in calculating the IHT bill.
Less CGT payable
Capital gains tax (CGT) is payable on most gifts if the asset has gone up in value during your period of ownership. In the past, CGT has often been a factor preventing gifts being made.
Take Ben, who has a quoted shareholding in XYZ plc now worth £100,000. He acquired it in 1998 for £90,000. He thought about giving it to his children a couple of years ago. At that stage it was worth £150,000, and he worked out that his gift would trigger an upfront CGT liability of around £15,000. Now with the fall in the stockmarket, the gain is almost entirely covered by his annual CGT allowance of £9,600. And, above that, CGT is now only payable at 18%, giving rise to a CGT bill of merely £72 on the gift.
Gifts to trusts
Many would prefer not to make large outright gifts to children or young adults, but since 2006 IHT is payable upfront on gifts to most lifetime trusts in excess of £312,000 (or £624,000 if spouses give half each). If one takes the view that values over the long term will increase, now might be a good opportunity to place assets in trust.
Mr and Mrs Cooper are in their 60s and have built up significant wealth. Their two children are at university. While they want to ensure that their estate is preserved as far as possible for their family, they are of the view that the children should not receive assets at this stage in an uncontrolled fashion. The Coopers own a commercial building as an investment. Its value has come down over recent months. It is now worth £600,000, down from a peak of £850,000 about 12 months ago. However, that is still much more than the £300,000 they paid for it many years ago.
If the Coopers had given the property to a trust for their children last year, they would have had to pay upfront IHT of some £50,000. Now they can place it in trust without any upfront IHT at all. And there is no need to worry about CGT either: they can elect to 'hold over' the gains so that the trustees are treated, for CGT purposes, as acquiring it for £300,000.
This means that any CGT liability is deferred until any subsequent sale by the trustees. So Mr and Mrs Cooper have got the property out of their estates and into trust without any tax liability. By using a trust, they save upfront CGT of £50,000 and at least £240,000 of IHT after seven years.
Executors dealing with the estates of those who have died recently will want to consider carefully whether the IHT bill can retrospectively be reduced where assets have fallen in value. There are two main types of relief available here:
- Where the deceased had made a gift within seven years of his death and the asset concerned had fallen in value during that period, the lower value can often be substituted as mentioned above.
- Where certain assets are sold by executors for less than they were worth at the time of death, the lower sale price can generally be substituted and an IHT refund claimed.
The Chancellor has temporarily raised the stamp duty land tax (SDLT) threshold from £125,000 to £175,000. As well as assisting with the purchase of some properties, this could be useful in the context of certain gifts.
Consider Edward, who lives in Oak Tree Cottage, which is worth £400,000 and subject to a mortgage of £150,000.
The house is now too big for him and he wants to move into his smaller second property. His son, Fred, wants to move to Oak Tree Cottage with his young family and is happy to take on the mortgage.
Previously Edward's gift of the property subject to the mortgage would have triggered an SDLT liability of £1,500 (1% of the amount of the mortgage). Now, however, there would be no SDLT at all as the amount of the mortgage is below the current threshold.
These are just some of the ways in which it might be possible to take advantage of values currently being low. It should be emphasised, however, that this is only a summary and that specialist advice should always be sought.
Charles Hutton is a partner in the private client department at City law firm Speechly Bircham LLP.
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