I am at an age where I wish to pass my assets, including a large property portfolio, to my two grandchildren (who are over 18). What tax considerations should I be aware of before making this decision?
Owen Byrne, senior associate at law firm BDB Pitmans, says this is a happy scenario for the grandchild, but a worrying one for the middle generation — their parents. A common concern expressed is that children risk having too much, too soon — for example, in their twenties — potentially ruining a growing work ethic.
In this scenario, practical considerations cannot be separated from tax considerations. In fact, they govern tax considerations.
As well as the grandparent using the standard inheritance tax (IHT) exemptions (an annual £3,000 exemption, a surplus income exemption and gifts on marriage), the easiest estate planning is to give assets away and survive seven years. The value then falls out of the donor’s estate for IHT purposes.
If the donor dies within seven years, any value above the donor’s available nil rate band (£325,000) is subject to IHT at 40 per cent. However, the IHT tapers to as low as 8 per cent after six years) according to the length of time since the gift. Even if the donor is worried about surviving seven years, it is worth getting the clock running to benefit from the discount on the 40 per cent death rate.
The outright gift is a disposal for capital gains tax (CGT) purposes by the donor. Assuming the donor is a higher rate taxpayer, the gains will be taxed at 20 per cent on commercial property or 28 per cent on residential property. Paying CGT, even at 28 per cent, and surviving seven years so there is no IHT charge, is cheaper than 40 per cent IHT on death, but the cash has to be found.
A parent worried about their child’s access to capital might suggest using a trust, allowing the grandchildren some benefit but leaving control of the capital to trustees, who could include the parents. The drawback is an upfront inheritance tax charge: 20 per cent at lifetime rates, uplifted to 40 per cent if the grandparent dies within seven years.
The gift into trust is again a disposal for CGT purposes. Instead of the grandparent paying the CGT, he or she and the trustees can elect for the gain to be held over, meaning the trust takes the properties at the grandparent’s acquisition value. It will only pay CGT when later disposals are made, whether by sales or passing the property to a beneficiary.
The grandparent needs to have three important conversations. The first should be with a financial adviser to discuss affordability; the next with parents of the grandchildren; and the third with a lawyer. Two of the three conversations might result in professional fees but together might avoid a lot of internal family strife over time.
Peter Daniel, partner at law firm Collyer Bristow, says making lifetime gifts to pass assets down a generation, or in this case, two generations, can be a very effective way to mitigate IHT on your eventual death. Depending on the circumstances and the nature of the assets, there are various ways of doing things which vary in complexity and tax-effectiveness. Assuming in this case that straightforward gifts to grandchildren are contemplated, there are a number of tax issues to consider.
First is IHT. If you survive for seven years after making a gift, there will be no IHT on it at all (with the amount payable starting to taper after three years). Therefore it is possible to give away as much as you like during your lifetime without triggering IHT.
Bear in mind, however, that you must not benefit in future from the assets that you have given away, otherwise you may fall foul of rules on “gifts with reservation of benefit” or “pre-owned asset tax”, with the effect that the assets will either remain in your estate for IHT purposes, or that you will have an income tax charge on them. A common example is giving away your home and then continuing to live there without paying a full rent.
The next tax to consider is CGT, as a gift counts as a disposal for CGT purposes. Giving cash is straightforward, because there will be no gain. However, other assets may have increased significantly in value since they were acquired. There are certain circumstances in which there is CGT relief — for example where the subject of the gift is your main home — or deferral, where the assets are business or agricultural assets.
The property portfolio is a particular concern if the properties have been held for a long time. Properties standing at little or no gain should be gifted ahead of those with bigger latent gains. It may be possible to gift one or more properties gradually over time, ensuring that the gain relating to the portion given in each tax year falls within your annual CGT allowance, currently £12,000.
A further tax to consider in relation to the property portfolio is stamp duty land tax (SDLT). There is no SDLT on gifts. However, if a property is gifted subject to a mortgage, then SDLT is charged on the amount of the outstanding mortgage.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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