Capital gains tax and inheritance tax are the kinds of subjects some don’t understand and the rest wish they didn’t exist. Handing over often eye-watering sums of cash in the case of inheritance is never a pleasant thing, though there will always be ways and means by which both CGT and IHT bills can be reduced. For those with a second home, trusts have the potential to be uniquely valuable in reducing both IHT and CGT expenses.
Second homes are surprisingly common assets among the UK public. From buy-to-let investments to holiday homes on the coast to weekend flats in the capital, millions have invested or are considering investing in second properties. In many instances, the decision is eventually made to pass the property on, but when this happens, how can the IHT and CGT bill be minimised?
Reservation of Benefit for IHT
If the property is gifted away though is still used by the giver as a source of income, the gift will be ineffective for IHT. There’s really nothing that can be done about this and the income the property generates is to be kept by those giving the property away.
Retaining use of the property rather than continuing to receive any income from it is an easier approach, which usually involves giving the property away and then paying rent for the times the property is used. This prevents any benefit being deemed to arise and represents consideration. The bonus being that the rent paid may be pretty much the same as what was being paid for maintenance beforehand anyway.
Shared ownership is also an option, wherein joint occupation of the property effectively cancels out the giver’s on-going use of the property, representing benefit and making the gift effective for IHT. As long as both the giver and recipient make use of the property throughout the year, it is a fair and risk-free strategy.
Using A Trust for CGT
In terms of CGT, which is payable in inherited properties in the same way as if they were being sold, trusts can be helpful. By making gifts into trusts, the gift still represents a disposal but provides the opportunity to holdover the gain arising to sidestep the usual immediate charge. As such, the CGT bill hasn’t necessarily been avoided, but has instead been put on hold in order to prevent CGT from getting in the way of giving the gift in the first place with IHT in mind.
Again, it’s a totally legal and risk-free strategy, just as long at the rules are followed.
The simple fact of the matter is that there are always ways and means by which both IHT and CGT can be brought down to absolute minimums – overpaying in any area of tax simply isn’t a good idea. It is therefore essential to seek professional, independent financial advice before making any final decisions with regard to property gifting or inheritance in general, in order to avoid unnecessarily overpaying.