Tax & IHT guidance - Intelligent Money Private Clients
Discussion
I hope this is the correct thread for this. It seems a relatively simple query, but my accountant baulked at it and pointed me towards some inheritance tax specialist who was going to cost me a bloody fortune for this one query.
I was fairly happy with pension planning etc., until I did me and my wife’s wills recently and some alarm bells started to ring as I thought about it. Wife and I are in mid 60s, and two kids in mid 30s – once wife and I are both gone the kids get everything equally. Unless I live an unreasonably long time or spend what’s left pretty wildly, there will be inheritance tax to pay.
We have a few rental properties in joint names, and in retrospect I felt these should have been in a limited company. Not a lot we can do…except we had the opportunity to build another new house for rent and so for this I created a new limited company – PropertyCo. Me, my wife, and both kids are 25% equal shareholders, and the only asset PropertyCo has is the house, and its only income is monthly rental. On death, our shares pass equally to the kids.
But in order to build the house PropertyCo needed cash. I had a small company (MyCo) that I used when consulting, with just me and my wife as equal shareholders. I’ve long since retired, and so rather than drip-feed out the cash left in the business over a period of time, it lent around £150K to PropertyCo. So MyCo doesn’t trade as such, and it’s value is simply the value of the loan to PropertyCo. PropertyCo therefore currently pays the MyCo loan back off the rent it receives, and we take out dividends. Once the loan is repaid then I’ll close MyCo…or at least that was the original plan.
But I also loaned PropertyCo cash to build the house too – around £400K. This was money I’d paid tax on, so the ‘income’ based on the repayment of that loan from PropertyCo would be tax free. But for neatness I felt I should settle the MyCo loan first so I could close the MyCo business.
OK – here’s what I’m thinking. If the wife and I keel over then the kids will inherit the MyCo business with a debt against PropertyCo, and my estate will also show a debt against PropertyCo. Obviously over time the value of these debts will have reduced as they’re repaid monthly. But I gather these debts have to be settled on death, so it’s likely the house would have to be sold to clear the debts immediately if we drop sooner rather than later.
My new plan, and one I’d like comments on, is I gift my and my wife’s shares in MyCo immediately to the kids so they are sole owners of that company and therefore the PropertyCo debt to MyCo. But I don’t know f there’s any implication of gifting shares? I’d then use the rent in PropertyCo to pay my personal loan back and the debt on MyCo would remain unserviced (until my loan is repaid). So on death (and assuming 7 years or more from now) PropertyCo’s debt to my estate is a more serviceable level, and there’s no debt payable immediately (or IHT) from MyCo as they already own it.
Make sense?
I was fairly happy with pension planning etc., until I did me and my wife’s wills recently and some alarm bells started to ring as I thought about it. Wife and I are in mid 60s, and two kids in mid 30s – once wife and I are both gone the kids get everything equally. Unless I live an unreasonably long time or spend what’s left pretty wildly, there will be inheritance tax to pay.
We have a few rental properties in joint names, and in retrospect I felt these should have been in a limited company. Not a lot we can do…except we had the opportunity to build another new house for rent and so for this I created a new limited company – PropertyCo. Me, my wife, and both kids are 25% equal shareholders, and the only asset PropertyCo has is the house, and its only income is monthly rental. On death, our shares pass equally to the kids.
But in order to build the house PropertyCo needed cash. I had a small company (MyCo) that I used when consulting, with just me and my wife as equal shareholders. I’ve long since retired, and so rather than drip-feed out the cash left in the business over a period of time, it lent around £150K to PropertyCo. So MyCo doesn’t trade as such, and it’s value is simply the value of the loan to PropertyCo. PropertyCo therefore currently pays the MyCo loan back off the rent it receives, and we take out dividends. Once the loan is repaid then I’ll close MyCo…or at least that was the original plan.
But I also loaned PropertyCo cash to build the house too – around £400K. This was money I’d paid tax on, so the ‘income’ based on the repayment of that loan from PropertyCo would be tax free. But for neatness I felt I should settle the MyCo loan first so I could close the MyCo business.
OK – here’s what I’m thinking. If the wife and I keel over then the kids will inherit the MyCo business with a debt against PropertyCo, and my estate will also show a debt against PropertyCo. Obviously over time the value of these debts will have reduced as they’re repaid monthly. But I gather these debts have to be settled on death, so it’s likely the house would have to be sold to clear the debts immediately if we drop sooner rather than later.
My new plan, and one I’d like comments on, is I gift my and my wife’s shares in MyCo immediately to the kids so they are sole owners of that company and therefore the PropertyCo debt to MyCo. But I don’t know f there’s any implication of gifting shares? I’d then use the rent in PropertyCo to pay my personal loan back and the debt on MyCo would remain unserviced (until my loan is repaid). So on death (and assuming 7 years or more from now) PropertyCo’s debt to my estate is a more serviceable level, and there’s no debt payable immediately (or IHT) from MyCo as they already own it.
Make sense?
tvrolet said:
...
Make sense?
IANAL,(just a random bloke on the internet), but some things to consider...Make sense?
What happens if the kids die before you? This is the first question that needs to be answered when gifting something that you care about.
I think that it is actually not "tax-legal" to gift something, but continue to benefit from it as if it were your own. If, for example, if a mother gifts her house to her children, HMRC want to see that she has been paying the market rate in rent to live there. Otherwise, it doesn't count as a gift, and the 7-year rule does not apply.
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