Gift a share in your investment property. Keep the rent. Potential WIN:WIN

An investment property portfolio can be a fantastic source of income for retirement, evident by the number of doctors and dentists that choose to invest their hard earned cash into investment properties. Equity builds up over the years so when the day arrives to slow the pace down with treating patients you have a profitable asset at your disposal. Have you considered all your options though with maximising the return on your investment whilst saving tax?

Effective retirement planning and IHT

Part of effective retirement planning is to consider assets in line with not only retirement objectives but also in line with your Will, making preliminary arrangements for the inevitable. Inheritance tax (IHT) is often referred to as an “optional tax” because with careful planning you can eliminate it or at least significantly reduce it. It is therefore worth understanding how IHT works and speaking with your accountant and financial advisor, both of who can help clarify.

The “live for seven years” rule

A simple rule is relating to Potentially Exempt Transfers (PET’S) where by you gift an asset and live for seven years then it is exempt from IHT. Read our related article. However, IHT is a complex tax and it isn’t quite so simple as perhaps the surface would suggest. Lets not forget, HMRC is not in the habit of allowing tax situations to be quite so simply win:win!

The “gift with reservation” rule regarding investment property

Gifting a rental property, for example, with the hope to live seven years and take advantage of the PET whilst also continuing to use or enjoy the asset in some way, would be a clear win:win for the tax-payer. Therefore HMRC have written legislation around “gifts with reservations” (GWR), relevant particularly for income generating assets such as rental properties. Apart from surviving seven years, broadly, the following must also occur for the gift to be exempt from IHT: 1) The recipient needs to enjoy immediate possession of the property

or

2) The donor must cease benefiting from the gifted property

Important point 1 – Gifting just part of your investment asset

The GWR rules are complex and most fall outside the scope of this article. Somewhere amongst them though there is reference to the “gift of an undivided share of interest”. This basically means the gift of part of an asset. In 2009 legislation updates suggest that the gift of an “undivided share of an interest in land” held certain exemptions.

Important point 2 – Don’t occupy the property

Put as simply as possible, GWR rule would not apply if: 1) The donor didn’t occupy the land 2) The donor occupies the land but pays a market rent 3) Both the donor and the recipient occupy the property but the donor doesn’t directly benefit from the arrangement, i.e. pays costs etc. This suggests then that as long as you gift only part the asset AND don’t occupy the property the exemptions will apply. Could this be a way for you to still be able to benefit from receiving rental income from a part gifted property?

IMPORTANT points for further notes

To reiterate so far:
  • The asset must be gifted only in part
  • The donor must not occupy the property
  • The donor must survive seven years for it to be classed as a PET
Plus:
  • It is important to take into account that the donor has disposed of part of their asset so CGT may arise if there is a gain on the property. Usual CGT exemptions should apply here to reduce it.

Risk versus reward

So this is a potentially good way to tackle IHT, make an early gift of an asset to reduce your estate and still benefit from the income source. However, whilst this has been heavily discussed by many leading tax experts and considered to be robust there are lots of factors and this could be challenged by HMRC.

Accountancy, financial and legal advice is required when deciding if this is a viable option for you.

Mark Ibbotson, Client Director at Figurit has vast tax knowledge to help with this topic. Call Mark today if you would like to discuss your IHT options and make sensible retirement plans on 020 7376 9333.