Trust post - Property portfolio client

Dear All

If you have a big property portfolio and are afraid that your children will have a hefty inheritance tax bill to deal with.

Are there any trusts that can be used to help reduce this?

Appreciate any response


Yes. You can put the properties/part/interest in them into a trust with CGT hold-over relief using your NRB. And hope to repeat it in years’ time. But on the generous information provided this is an answer as valuable as something out of a Fortune Cookie.

Jack Harper


Seek professional help through a Financial Adviser who deals specifically with inheritance tax mitigation. This is something that should have been done whilst building a portfolio of property to reduce taxes.

Just make sure that the IFA is actually ‘Independent’ and not tied to specific product. Some firms say they are IFA, but are actually tied and that may not be a good way to go.

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This is a situation where financial advisers may struggle because their products don’t really cover this type of case, unless the client converts property into cash. We are accountants and have many clients who have built substantial property portfolios and who have focused on creating wealth, have stopped developing and live off the income -or sell the portfolio and create cash. IFA input on pensions and life insurance is often useful.

Techniques that can be used involve the creation of property partnerships and/or incorporation followed by creation of different classes of share. There are ‘control’ shares (parents who have built the portfolio retaining control of strategy and direction of the company) and ‘participation’ shares - which enjoy the income. This ‘freezes’ the value at current value for IHT purposes so any future growth in the value of the portfolio is outside of the scope of IHT. The participation shares are put into trust.

If part of the portfolio can be liquidated tax efficiently and then reinvested in property for development then part of the portfolio can qualify for BPR after wo years.

We also link this to pensions and estate planning via wills. If the client is prepared to consider commercial property then pensions can be particularly useful. If there is incorporation, the company profits can fund contributions into a SIPP (potentially £120k per person in the first year and 40k thereafter).
This in turn shifts part of the value outside of the estate for IHT purposes.

Any residual IHT exposure can be dealt with by wills which create a life interest in favour of the surviving spouse on the first death. The estate gets a free CGT uplift to date of death. The survivor’s life interest is then terminated, creating a deemed PET, or there is a wait of two years and transfer into trust of any interest that qualifies for BPR.

There are a number of landmines along the way - in particular CGT and SDLT. Also worth the client executing a separate commercial LPA governing their property portfolio interests.

Suggest the client is referred to an accountant who will work alongside you and the client and will dovetail with wills and estate planning.

Michael McCabe
Galloways Accounting Private Client Limited.

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From an IFA’s perspective, and as a CTA involved in trusts for many decades, keeping it simple and flexible tends to work best for most clients, so in this situation, assuming the parents meet all the relevant criteria, lifetime mortgages are a possibility to consider, as even with the recent interest rate increases, rates on lifetime mortgages are still significantly cheaper than 40% IHT. They can have flexibility if there is a desire to minimise the costs of accumulating interest, enable lifetime gifting to reduce estates down to sub £2m for RNRB purposes by introducing (lifetime mortgage) debt into the estate as an IHT reducer, and insurance is a possibility to cover the 7 year gifting period. The use of such equity release also needs a valuable personal UK residence on which to be attached, which can be a limiting factor, as it is such property that the withdrawal limits are based upon.

If the rate due on the lifetime mortgage is similar to the long term property growth rate, then little is lost in overall value over time. It just depends on how desperate the family are not to pay IHT.

Thought should also be given to the financial acumen of those potentially receiving the gifts, particularly if large and unexpected, and how these should be managed for the family’s best long term interests, both in tax efficiency and providing for them over the long term. This potentially is where I would consider the use of trusts, for wealth protection and individual protection from wealth.

Graham Harmer
Harmer Financial Services Limited

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