Inheritance Tax Planning for Property Developers, Landlords and Managers

Published: 14th December 2007

Inheritance Tax is charged by reference to asset values The first £300,000 of relevant assets (rising to £325,000 by April 2009) is free from tax and the remainder is taxed at 40%.

There are a number of reliefs from Inheritance Tax and the important ones are as follows:

1. Gifts between husband and wife (providing they are both UK domiciled) are free of inheritance tax
2. Gifts to charities are free from inheritance tax
3. Gifts of assets qualifying for Business Property Relief (BPR) are free from inheritance tax

It is the third of these exemptions which is of particular importance to developers, landlords and managers. Only trading businesses attract BPR, so the business must make its profits by trading rather than by simply holding assets for profit. This means property development and property management are qualifying trades but owning properties to rent out is not.

However, many businesses carry out both property development (or management) and property rental within one single company or group of companies. For example, a development company might develop a property and then rent it out and so carry out both trading and non trading activity. This runs the risk of losing the ability to claim BPR for the trading activity. It is therefore important to try and structure the business in such a way that one company carries out the development and another takes on the completed properties to rent them so as to enable the relief to be claimed on the trading activities.

Similarly, a company that owns a block of flats some of which have been sold and some of which are retained to be rented out should separate the property management from the rental business to ensure BPR can be claimed on the property management part.

Where there is a proposal to sell a business qualifying for BPR, consideration should be given to as to what is to happen to the proceeds of sale. Inheritance tax planning opportunities often occur prior to sale and might not be available following the sale.

Even for businesses not qualifying for BPR it may be possible to carry out inheritance tax planning to pass the value of the business to the next generation without losing either control or the required income stream.

The Mace & Jones Trusts, Tax and Estate team are well versed in the tax planning required for Property Developers, Managers and Landlords. If you are interested in looking into whether this form of planning may be utilised by you or one of your clients then please let your regular contact at Mace & Jones know and they will put you in touch with a member of our Tax, Trusts and Estates team.