Freezer/growth a property IHT option

For persons with a property portfolio one of the tax headaches, keeping them awake at night, is how to mitigate their inheritance tax (IHT) liability when passing on the properties to their children or grandchildren on death.

In the vast majority of cases the property values, net of any liabilities, such as debt, will form part of their estate for IHT purposes, resulting in a potential IHT charge of 40%.

There are limited ways to minimise this tax hit. One such option requires the property portfolio to be housed in a corporate vehicle.

As long as the company has been set up for bona fide commercial reasons, the parent’s shares could be frozen at the current market value of the company. In broad terms, that is likely to be the value of the properties, plus any retained reserves within the company, less any outstanding debt. Care needs to be taken that the parent’s shares are not undervalued as this could have negative tax consequences. To play safe, you may want to freeze those shares at market value plus say, 15%.

The company could then grant a second tranche of ‘growth’ shares, either directly to the children or through a trust (if you want to put a protective wrapper around the shares in case of potential issues in the future, such as divorces). If the company increases in value above that set for the freezer shares, that growth will drop into the children’s shares and fall outside the parent’s estate for IHT purposes.

The increase in the company value could come about from property capital growth, the reduction in the corporate debt and/or retained profits which neither the parents nor the children require being paid out of the business.

If properly implemented, this planning can be used even for children of a minor age. However, if a dividend is paid out on those particular growth shares it would be taxable on the parents and not the minor kids.

Example

► Tom, is a single man, with two children from a previous relationship.

► He has an established property investment company.

► He decides to freeze his shares at an acceptable value of £1 million.

► The company grant growth shares to his two children.

► 10 years later Tom sadly dies at which point the company is valued at £3 million.

► Carrying out this planning has saved his estate at least £800,000 in inheritance tax.

If this is of interest to you please do not hesitate to contact us, as we can call upon specialists to look at the feasibility and the implementation of going down the freezer/growth shares route.