Incorporating your portfolio can be one way to mitigate the IHT liability on your property portfolio when you die, providing you approach it with care and our expert advice.
Limited companies are not affected by the new mortgage interest relief restriction which came into effect from April 2017. Interest payments for limited companies is classed as a business expense and fully deductible against income.
Companies pay Corporation Tax at a fixed rate irrespective of the size of the profits. The Corporation Tax rate is currently at 19% reducing to 18% in 2020. This makes the tax rate very attractive compared to 40% for higher rate tax payers and 45% for additional higher rate taxpayers.
You may have to pay Capital Gains Tax when you incorporate your portfolio. But if you have four or more properties in your portfolio, you may qualify for “section 162 Incorporation Relief”, which could remove the Capital Gains Tax burden.
Incorporating your portfolio gives you much more flexibility regarding reducing your IHT liabilities and other estate planning decisions . You have the option of giving your kids shares in the company instead of whole properties. This can help you manage your exposure to CGT, by using your annual allowance to gift shares to your children. It can also help you control the speed at which you divest yourself of income in favour of your children.
You can restructure the company to your advantage, using Class A and Class B shares, and preference and ordinary shares, to control yours and your children’s access to income and control of the company.
If you require the rental income, having an incorporated portfolio can enable you to steadily transfer the portfolio to the kids whilst retaining income for yourself.
You can also sell shares to your children at full market value, but take payment by monthly instalments. The instalments would be classed as loan repayments for tax purposes, and would be yours without an Income tax liability.. You can even include a clause in your Will so that the outstanding debt dies with you.
If correctly set up and properly documented, either arrangement would be a valid commercial arrangement that passes your portfolio to the next generation without incurring Inheritance Tax.