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Press Room Media Coverage Money Observer (February 2004) “My wife and I are joint tenants of the house we own and live in. We are considering adding our adult son as a third joint tenant. What are the capital gains tax (CGT) and inheritance tax (IHT) implications of doing so? Joint tenants are two or more people who own a property together. The joint tenants do not own distinct shares in the property. If one of them dies, the others will continue to own the property. Only the last joint tenant to die can pass the property on in their will. The alternative to a joint tenants’ arrangement is ‘tenants-in-common’. Each tenant has a distinct share and can pass it to someone on their death. With regard to gifting away a percentage share in the property, Simon Higginbotham from HR Estate Planning Services (0161 435 6014) says you should change the ownership to tenants-in-common. Any potential gift would then be subject to the Inland Revenue’s potentially exempt transfer rules (where the donors would have to survive for seven years for the gift to be free from IHT)…” Money Observer (February 2004) “Valuable assets, particularly your house, are at risk as the government tries to close tax loopholes on estates… A staggering 1.5 million homeowners are potentially caught in the inheritance tax (IHT) trap, according to figures from Halifax. But the Chancellor, Gordon Brown, plans to crack down on loopholes that have enabled people to ensure that the value of their residential property does not attract a hefty IHT bill…. …Simon Higginbotham, a partner at HR Estate Planning Services, says anybody who has done a double trust plan or a Meville 2 scheme should be aware that the Revenue could decide to challenge them. “They are still a punt and there are no guarantees they will work. Anyone who has been told this at the time they were set up has been ill advised,’ he says…. Higginbotham says one option for married couples who want to utilise both nil-rate bands, but want primarily to ensure the surviving spouse has complete access to and use of all the property and chattels, is to establish through their wills two lifetime discretionary trusts, which enable the trustees to make loans to beneficiaries. On the first death, all of the assets of the deceased pass to the survivor, including a part share in the family home. The surviving spouse in return provides the executors of the deceased with an IOU equal to the lower of the value of the assets transferred and the nil-rate band. Once this has taken place the executors transfer the IOU into the deceased’s discretionary trust. The surviving spouse has full and unrestricted use of the property during their lifetime, together with the flexibility to move house should their circumstances change. This scheme coverts assets that are difficult to give away, for example, a part share in the family home, into an IOU. According to Higginbotham, this helps avoid the technical problems associated with other schemes known to be disapproved of by the Inland Revenue….” The Independent (Saturday 27 December 2003) “In June, I submitted my tax return for the 2002-03 year. After five months of regular complaints about the delay, I received £635 for overpaid tax. Now the Inland Revenue has written saying it has miscalculated and I must repay £80. It has given no explanation and demanded payment within one month. NS, by email. Sandra Smith, of HRS Taxation Services says your situation is not uncommon. “The Inland Revenue have been dealing with tax credit applications for the first part of the new tax year and it would appear self-assessment returns were not dealt with,” she says. It is taking several months for returns to be dealt with and the backlog appears to be growing. The Inland Revenue don’t always get it right. I understand they aim to achieve a 95 per cent success rate, but they have a 25 per cent failure rate for the 2001-02 tax year, so one in four tax returns were calculated incorrectly. “They are, unfortunately, within their rights to ask for a refund of any amount overpaid incorrectly and will charge interest if they do not receive a timely response. Your reader may wish to make a complaint to the area officer, but this may result only in an apology.” The Independent (Saturday 20 December 2003) "As families gather for Christmas, parents may wonder how to ensure, after they die, their children and grandchildren benefit from the full value of their home. But the Chancellor has a message for them, which will not help the turkey go down. His Pre-Budget Report last week may have suddenly made it a lot more difficult and expensive to avoid inheritance tax (IHT) on the family home…. ‘I prefer to spend my own money’ Frank Rawcliffe, 70, of Stourbridge, is one of many who is concerned at the prospect of his estate paying a large IHT bill. “I don’t see why we should keep giving money to the Chancellor,” he says. “I’d much prefer to spend my own money.” He wrote to The Independent seeking advice on how to ensure that his estate gets full benefit from the family home without it having to pay IHT… Simon Higginbotham, of HR Estate Planning Services, is certain the use of an IOU in a will trust is unaffected by the proposed new rules and is ideal for people in Mr Rawcliffe’s situation. Mr Higginbotham proposes that two lifetime discretionary trusts are established, enabling trustees to make loans to beneficiaries. After the death of the first spouse, all their assets pass to the survivor, including their part-share in the family home. The surviving spouse gives the executors an IOU equal to the lower of the value of the assets transferred or the nil rate band, which the executors transfer into the deceased’s discretionary trust.” Mortgage Advisor & Home Buyer (December 2003) “Significant property price rises in the last five years have put many homeowners in an enviable position. As they are now able to make money out of their largest asset, a growing number of people have been tempted to invest in a second home… Buyer beware Yet enticing as all this may seem, purchasing that dream country cottage, seaside retreat, or buy-to-let investment should not be considered lightly. Mark Roberts of HR Property Services advises buyers venturing into this market to consider what effect a rise interest rates or slowing of house prices may have on their financial position: “The most popular method of funding a second home or investment property is for clients to release equity on their main residence or other investment properties,” he explains. “The worry is that many will raise capital to the maximum to fund their deposits before borrowing the remainder, potentially placing them in a difficult financial position.” According to Mark Roberts, the type of mortgage a buyer may use depends on why the client is buying and what the lender’s criteria may be. “A second property purchased as an investment and let out would, in most cases, be purchased via a buy-to-let mortgage, “ he says. “A second property or holiday home can be purchased with a second mortgage, but you will need a larger deposit, the rate will be slightly higher and you will need to show you can afford the loan.”…. Beating the taxman Taxation is a crucial issue when deciding on the purchase of a second property. Sandra Smith, of HRS Taxation Services, points out that if the property is bought for private use and is not rented out then there is no need for the owner to report it to the Inland Revenue until the property is sold. “Capital gains tax, will be charged once the second property is sold or transferred, on the profit made between the purchase price and the selling price or the value at the date of sale,” she says. Allowances are given for anything spent on enhancing the property and the cost of sale during the period it has been owned. There is currently an annual exemption of £7900 on these properties, and any gain remaining is taxed at 40%. Homes that may be treated as furnished holiday lets have some income tax advantages over properties rented as a business, according to Sandra Smith, but they must meet strict criteria to be classed as such. “Interest relief on nay loans taken out to purchase a second or subsequent property will not be available unless the property is let out on a commercial basis as a furnished holiday letting or as a rental business,” she states…. Money Observer (October 2003) “Pensions might be the most tax-efficient way to plan for retirement, but they are inflexible – you can’t access the money until you retire and you have to use at least 75 per cent of it to buy an annuity from an insurance company. As a result, many people complement their pension plans with other investments…. Property "Bricks and mortar has long been considered one of the most reliable long-term investments…Many people are now using buy-to-let properties in particular to supplement their other pension vehicles…. Mark Roberts from HR Property Services adds: “We have a number of clients who, in addition to more traditional retirement planning methods, purchase buy-to-let property. Clients tend to be looking either to purchase a lower valued property and use the rental income to provide an immediate income, or to purchase a property whose rental income will just cover the mortgage while they are working and provide an income in retirement. ‘Younger clients have a tendency to purchase higher-valued properties with a view to achieving stronger long-term capital growth. The client can choose at retirement to sell the property or to receive rental income, depending on their circumstances.’ Roberts urges his clients to consider the implications of income tax, capital gains tax, inheritance tax and stamp duty before they take the plunge. But despite a less favourable tax regime for buy-to-let in comparison with other pension vehicles, Roberts believes it sits side by side in wider retirement planning. In short, traditional pensions offer valuable tax breaks, but buy-to-let offers more flexibility…..” Investors Chronicle (5-11 September 2003) “…Inheritance Tax (IHT) was introduced in its present form in 1986 but, over recent years, its impact has broadened considerably – primarily because of rocketing UK property values…. Double Trusts “One option is to use what’s known as a ‘double trust’ plan or ‘home loan scheme’. In a nutshell, this involves getting the house valued, then setting up a property trust and selling the house to it. The homeowner is a lifetime beneficiary of this trust, which means he can continue to live in the house during his lifetime. The property trust is only obliged to pay for the house on the death of the homeowner, and therefore simply gives the homeowner an IOU. Another trust – this time a discretionary trust for the benefit of the children after the homeowner’s death – is then set up, and the homeowner gives the IOU to it as a gift. He then needs to live another seven years in order for the gift to fall out of his estate. Simon Higginbotham, of HR Estate Planning Services, explains what happens on the death of the homeowner: “When he dies the property trust will be assessed for IHT because he has been a beneficiary of it. However, the IOU is deductible against the value of the home owned by the trust, so only its net value is subject to IHT.” Importantly, the property counts as a principle private residence and is exempt from capital gains tax (CGT) when it is sold by the property trustees….” The Guardian (Saturday 13 September 2003) “There are supposedly only two certainties in life – death and taxes. But when Benjamin Franklin came up with that thought two centuries ago, there was no such thing as inheritance tax…. Some planning revolves around lump sum insurance and with-profits bonds where advisors can earn substantial commission. But an increasing number of financial advisors suggest spending is the best way of keeping cash away from the Inland Revenue. The arithmetic is simple. Spend the money now and each £1 is worth 100p. Leave it in your will and each £1 is only 60p. So spending it gives a 66% increase. “Using the money when you are alive, rather than leaving it in a will is certainly worth thinking about,” says Simon Higginbotham at specialist IHT advisors HR Estate Planning in Cheshire. “If you have cash, you can enjoy it and dispose of it as you wish.”… One little explored route is to sell the property on retirement and move elsewhere but rent rather than buy. “Selling in an expensive area and moving somewhere cheaper but renting can make a lot of sense, “ says Higginbotham…. There are many attractive rural properties at £1,000 a month. Someone with £400,000 could pay this rental level for 33 years even if the cash attracted no interest. “That way, you can give money to grandchildren if you don’t spend it on yourself,” says Higginbotham. “It’s worth a lot more than left in your will”…. …An alternative, but less popular, form of equity release is the “reversion”….But Higginbotham believes many are held back from spending by “conventional psychology”. He says: “One of the most effective ways of dealing with IHT is to remove the money / asset from the estate, whether by gifting it away or spending it. But while this can prove very effective, in reality it very rarely happens. This is due mainly to the fact people feel vulnerable by giving away monies and potentially beholden. They don’t want to become financially dependent on children in the future…” Go into action at the double to find a way out Homeowners looking for a way out of future inheritance tax on their property have just over two months to use a little known trust scheme. The “double trust plan” aims to remove the present value of the family home from IHT, while still allowing the residents to live there. It exploits a basic IHT planning rule. Anything given away more than seven years before death escapes. But normally, continuing to live in the property invalidates this gift. Here, the property is turned into a sophisticated form of debt. “It becomes a super IOU which is gifted,” says expert advisor Simon Higginbotham. “You don’t give away the property which would not count. Instead, you gift the IOU.” The house has to have an up-to-date value from a chartered surveyor….” Media Enquires All journalist enquires should go through our PR agency, Pazang Ltd.
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