Reducing inheritance tax on residential property is a major concern for landlords. By using a family investment company structure you may be able to mitigate the IHT liability attaching to your shares. At the same time, you may also be reluctant to pass too much of the company’s current value over to the next generation and may wish to retain the current dividend flow.
In these circumstances, it may be worth you considering a form of planning using so-called “freezer” shares. The intention is to freeze the value of the shares belonging to you so that future growth in value accrues to their intended beneficiary – typically the next generation. This is achieved by altering the company’s Articles of Association to divide the company’s shares into two classes, A and B shares. The A shares carry an entitlement to dividends and/or capital on winding up equivalent to the current value of the company and are retained by you. The important thing to note here is that when incorporating the company, your current value is equivalent to the nominal value of your A shares. i.e. £1 per share as there are no other assets in the company.
All future growth in the value of the company will accrue to the B shares which will be given to your children or perhaps to a trust that benefits succeeding generations. At this point, there should be no IHT implications inherent in this planning. The new B class of shares will have only a nominal value as initially they have no voting rights, no dividend rights and no capital value above their face value. There has been no significant transfer of value because the value of the existing shares is not substantially reduced. On your death, you will be taxed only on the value of the company at the date the two share classes were created.
For many landlords who are higher rate taxpayers, using a limited company is in many cases the best solution to hold investment property. If you wish to incorporate Inheritance tax planning to protect your property wealth for the next generation then the FIC offers some very compelling advantages. As always, your individual circumstances need to be considered so get in touch on 0800 907 8633, via tax@fixedfeetr.com or via our online contact form for an informal no-obligation consultation. If you enjoyed this article, then why not read our post on tax benefits for electric cars or spouse exemption next?
Thandi Nicholls Ltd
Creative Industries Centre
Glaisher Drive
Wolverhampton
West Midlands
WV10 9TG
UKLandlordTax.co.uk is the trading name of Thandi Nicholls Ltd Accountants Registered Office: Creative Industries Centre, Glaisher Drive, Wolverhampton WV10 9TG.
Registered in England. Company Number 7319439. Director S S Thandi BA
