Landlords in Aberdeen and the surrounding areas were facing difficult market conditions prior to 2020 due to an acknowledged over supply of both residential and commercial property. A further drop in the oil price and the impacts of Covid-19 will have intensified the situation.

With pressure on both rental income and asset values, it’s not a great time to be a landlord in Aberdeen, but it may be the perfect time to consider Inheritance Tax (IHT) planning opportunities.

Should your estate exceed a certain value, property held personally or shares held in a property investment company are likely to be assessable to Inheritance Tax at a rate of 40%; a rate many find unpalatable and are often keen to mitigate.

Gifting assets

To reduce such an exposure, a common solution is to gift assets to the next generation, where the asset itself and the income from the asset are surplus to requirements. However, when gifting assets you need to be mindful that such a transfer is also a disposal at market value for Capital Gains Tax (CGT) purposes. Land and Buildings Transaction Tax also needs to be considered, but relief may be available if it is an outright gift and there is no transfer of debt.  

An opportunity to plan

It’s for this reason that landlords need to view the difficult local market conditions as an opportunity to plan and to take advantage of potentially lower property values. The often-used Churchill quote “never let a good crisis go to waste” has never been more apt.

Properties currently sitting at a loss or perhaps at a very small gain can be gifted without incurring an upfront capital gains tax charge. Such a gift becomes a Potentially Exempt Transfer for IHT and falls out with the donor’s estate after seven years, therefore it is possible to transfer assets without creating a tax liability.

Shares in property investment company

The same applies to shares held in a property investment company. The value of the shares will often be driven by the underlying value of the properties held within the company, consequently a drop in property values often reduces the overall value of the shares assessable to both CGT and IHT thus providing greater scope to transfer shareholdings and mitigating any potential tax exposure.

The role of trusts

Tax is only ever one of the considerations when transferring assets to the next generation. Trusts are often used when the transferor wishes to retain an element of control over gifted assets or does not believe the next generation are ready to control the gifted assets. Gifts to a discretionary trust, when made jointly between a husband and wife, are frequently capped at £650,000 as any value in excess of this may attract an immediate IHT charge at 20%. Undertaking steps when asset values are low, may enable you to transfer a greater proportion of assets, whether property or shares, into a trust before the £650,000 threshold is met.

The optimists among us believe the local property market will eventually rebound and assets values will increase. If they are right, you may wish to review your plans for passing on assets to the next generation and take the appropriate action sooner rather than later. Gifting assets when values are low ensures you are safeguarding your estate against future gains and possible increases in the rates of tax.

Should you defer considering your options to the future, values may have rebounded, and it may become a more difficult and costly proposition.

Get in touch

If you’d like to discuss your position, please get in touch with me directly at: Graeme.Cran@jcca.co.uk. The team at JC are on hand and ready to help.