Our team: Jonathan Riley
1.) Now is a good time to review existing structures
Over the years, structures have been created to hold residential real estate that are no longer fit for purpose. Typically, this might involve residential real estate being owned by an offshore company that in turn is owned by an offshore trust. In past years these arrangements offered protection from capital gains tax on a sale and protection from inheritance tax on the death of the beneficial owner or during the lifetime of the trust.
Following recent changes, these protections are no longer available; capital gains tax is payable on a sale and the structure offers no protection from inheritance tax. The structure might also be costly to run.
Below we mention the possible reform of both inheritance tax and capital gains tax. Against this background, now could prove a very good time to check whether any arrangement is still fit for purposes – and unwind or replace any arrangement that is not.
2.) Succession planning opportunity
Inheritance tax is assessed on individuals at the rate of 40% when they die. There are a number of reliefs available from this tax, including reliefs for property used as part of a trading business and gifts made 7 years prior to death. During the last 18 months the government has been consulting about reform of the tax. This year’s Budget (which at the time of writing is expected in November although no date has been set) would be a convenient time to introduce changes.
One possible change is the introduction of a gift tax that applies immediately when a gift is made – rather than only applying if the person making the gift dies within 7 years. A “gift tax” like this is administered successfully by many other jurisdictions.
Equally, many of the present reliefs are generous by historical standards and their reform would seem an easy target.
This could be a very good time to take advantage of the present planning opportunities – we might look back on the present regime as particularly generous.
3.) Minimising tax on capital gains
The government has launched a review of capital gains tax. Presently the capital gains tax rates are 28% in respect of residential property (for a higher rate taxpayer) and 20% in respect of commercial property. From 6 April 2019 capital gains tax has also been payable by non-residents in respect of UK real estate gains – whether the real estate is owned directly or indirectly via a “property rich” company.
There are many reasons to consider taking advantage now of the present regime. For example, it would be relatively easy for any reform to align capital gains tax rates with income tax rates – compared to an income tax rate of 45%, a tax on gains at 20% could be viewed as positively welcome. Moreover, certain reliefs might be withdrawn in the future – for example the capital gains tax relief that applies to a gifts of interests in property development businesses. Also, although the non-resident capital gains tax rules are subject to a general “anti-abuse” rule, understanding the limits of the legislation can enable you to acquire property in a way that falls outside of its reach.
Fladgate’s experienced private wealth team, headed up by Jonathan Riley, are on hand to advise clients on any of these aspects.