A landlord was keen to transfer his rental property portfolio to his children during his lifetime in order to mitigate inheritance tax, but was concerned that there may be significant capital gains tax implications on disposal.
After considering a number of different options, we concluded that a family trust route would be the most appropriate and tax efficient way to help our client achieve his goals.
This involved an outright gift of properties to the value of the annual exemption, meaning that no capital gains tax was chargeable on transfer.
We then arranged for our client and his wife to gift into trust the properties up to the value of their nil rate bands. The properties with the lowest gains in proportion to their value were transferred first so that they could benefit from an uplift in base cost, thereby reducing the capital gains tax liability on a future sale.
As our client intended to continue managing the properties, we suggested that he establish a property management company owned by him and his wife. They could then charge management fees to the trust and rental profits will be available through dividends.
Provided that both clients survive seven years from the date of gift, the properties will be outside of their estates and they will have saved Inheritance Tax of approximately £260,000.
By extracting rental profits via a property management company, our client will continue to profit from the properties without invoking any anti-avoidance measures.