BTLs and IHT (and then CGT)
Discussion
Hypothetical question;
A couple own a house worth £350k, cash assets of £150k, and 3 BTLs worth £500k
Q1
My understanding is that (combining their IHT allowances) ALL of the above can be passed on to their kid(s) IHT free. is this correct?
Q2
Is there any CGT charge when the children inherit the BTLs? If not, how is the CGT calculated when they eventually dispose of the BTLs? I assume it's based on the difference between selling price and ORIGINAL purchase price? Or is it based on the difference between selling price and market value when they inherited them?
All comments appreciated
A couple own a house worth £350k, cash assets of £150k, and 3 BTLs worth £500k
Q1
My understanding is that (combining their IHT allowances) ALL of the above can be passed on to their kid(s) IHT free. is this correct?
Q2
Is there any CGT charge when the children inherit the BTLs? If not, how is the CGT calculated when they eventually dispose of the BTLs? I assume it's based on the difference between selling price and ORIGINAL purchase price? Or is it based on the difference between selling price and market value when they inherited them?
All comments appreciated
) of course.Thanks both - the properties have been held for years so there would have been a hypothetical shedload of CGT to pay. As the intention was to donate them to kids/grandkids as their inheritance (and so they had somewhere to live) the fact that there won't be any CGT to pay will be a relief.
AIUI gifting them to the kids/grandchildren BEFORE death does generate a CGT liability - is that correct?
AIUI gifting them to the kids/grandchildren BEFORE death does generate a CGT liability - is that correct?
Countdown said:
AIUI gifting them to the kids/grandchildren BEFORE death does generate a CGT liability - is that correct?
Yes. CGT is triggered by "disposal", which includes gifting. But if the donor survives for 4 years the IHT rate will be no greater than the CGT rate. In many cases breakeven will be achieved after 4 years because the IHT tapers down.
After 4 years the IHT payable is 60% of 40% which makes 24%.
Note: This is an over-simplification. IHT is charged on the total value whereas CGT is only charged on the gain. But in a worst case scenario you can end up paying CGT that's quite quickly followed by IHT. Careful and specific planning is needed. There's also the possibility of buying life insurance to cover the risk of IHT after a lifetime gift.
Panamax said:
Countdown said:
AIUI gifting them to the kids/grandchildren BEFORE death does generate a CGT liability - is that correct?
Yes. CGT is triggered by "disposal", which includes gifting. But if the donor survives for 4 years the IHT rate will be no greater than the CGT rate. In many cases breakeven will be achieved after 4 years because the IHT tapers down.
After 4 years the IHT payable is 60% of 40% which makes 24%.
Note: This is an over-simplification. IHT is charged on the total value whereas CGT is only charged on the gain. But in a worst case scenario you can end up paying CGT that's quite quickly followed by IHT. Careful and specific planning is needed. There's also the possibility of buying life insurance to cover the risk of IHT after a lifetime gift.
Panamax said:
Yes. CGT is triggered by "disposal", which includes gifting. But if the donor survives for 4 years the IHT rate will be no greater than the CGT rate.
In many cases breakeven will be achieved after 4 years because the IHT tapers down.
After 4 years the IHT payable is 60% of 40% which makes 24%.
Note: This is an over-simplification. IHT is charged on the total value whereas CGT is only charged on the gain. But in a worst case scenario you can end up paying CGT that's quite quickly followed by IHT. Careful and specific planning is needed. There's also the possibility of buying life insurance to cover the risk of IHT after a lifetime gift.
In this example, assuming the £500k of properties are jointly owned then there would be no IHT taper relief if that's all they gifted. In many cases breakeven will be achieved after 4 years because the IHT tapers down.
After 4 years the IHT payable is 60% of 40% which makes 24%.
Note: This is an over-simplification. IHT is charged on the total value whereas CGT is only charged on the gain. But in a worst case scenario you can end up paying CGT that's quite quickly followed by IHT. Careful and specific planning is needed. There's also the possibility of buying life insurance to cover the risk of IHT after a lifetime gift.
They'd either live 7 years and it would fall outside of their estate, or they didn't and it'd use up £250k of each of their £325k Nil Rate Bands. In this example, it wouldn't matter as the whole lot is within £1m, so the rest of the estate would be covered by the remaining NRBs.
In short, you only get IHT taper relief on the amount gifted in excess of each person's NRB.
Thanks all
There won't be any disposals before both husband and wife have shrugged off this mortal coil. They would want to hang on to the income. So, given that the value of their estate would fall within the IHT threshold AND the CGY clock resets itself that seems the most logical way of dealing with their assets.
That however assumes that property values don't increase too much between now and the second death.
There won't be any disposals before both husband and wife have shrugged off this mortal coil. They would want to hang on to the income. So, given that the value of their estate would fall within the IHT threshold AND the CGY clock resets itself that seems the most logical way of dealing with their assets.
That however assumes that property values don't increase too much between now and the second death.
My previous post was about CGT with some general comments about the way taper of IHT can quite quickly bring its rate down to the same 24% rate, albeit charged on everything and not just the gain. You definitely don't want to pay both taxes if you can avoid it.
If you're motivated to play about with IHT there are various ways to suppress tax,
Rule one of tax planning is "make hay while the sun shines".
If you're motivated to play about with IHT there are various ways to suppress tax,
- Exempt transfers of £3k p.a, £250 gifts and £5k gifts in anticipation of marriage.
- The £325k nil rate band.
- PETs (potentially exempt transfers) where you're away scot-free if you survive seven years and pay a reducing rate of tax after surviving four years. Note it's the tax that tapers, not the gift.
- Lifetime gifts into trust. These are not PETs so you can, at least from the outset, seek to double-up your £325k tax free band. Anything over £325k put into trust will suffer immediate IHT at a 20% rate. Depending on how long you live after making gifts into trust and your overall pattern of giving, some or all of that 20% rate may later get revised upwards to 40%. But the bottom line is you can start out by making lifetime gifts AND putting £325k tax free into trust without paying any tax.
- Agricultural property and/or business property. There's currently a lifetime cap of £2.5m but the big advantage of these is potentially that you only have to survive two years to escape IHT rather than the usual seven.
Rule one of tax planning is "make hay while the sun shines".
Correct me if I'm wrong, but I think that the IHT due on a PET is only due on the amount over the £325,000 personal allowance.
So, although there is no IHT due on the amount of the PET up to £325,000, you are reducing the amount of your personal allowance.
That may affect how much IHT is due on the rest of your estate.
I presume the taper only applies to how much IHT your PET attracts and the personal allowance reduction would stay for the full 7 years.
Assuming no 28/10/26 changes.
So, although there is no IHT due on the amount of the PET up to £325,000, you are reducing the amount of your personal allowance.
That may affect how much IHT is due on the rest of your estate.
I presume the taper only applies to how much IHT your PET attracts and the personal allowance reduction would stay for the full 7 years.
Assuming no 28/10/26 changes.
OIC said:
Correct me if I'm wrong, but I think that the IHT due on a PET is only due on the amount over the £325,000 personal allowance.
I believe this is where the young people would say "obvs".You definitely DON'T get a £325k allowance for outright gifts plus another £325k for PETs plus another £325k on death. It's just one lifetime allowance across everything. But you don't start looking at tax on a PET unless and until death occurs within 7 years. Contrast gifts into trust which may be taxed immediately at the lower 20% rate.
Hence the situation where,
- a tax free gift into lifetime trust might later be caught by IHT if you die within 7 years.
- a gift into a lifetime trust which was taxed at 20% might be re-examined and taxed at a higher rate if you die within 7 years.
OIC said:
Correct me if I'm wrong, but I think that the IHT due on a PET is only due on the amount over the £325,000 personal allowance.
So, although there is no IHT due on the amount of the PET up to £325,000, you are reducing the amount of your personal allowance.
That may affect how much IHT is due on the rest of your estate.
I presume the taper only applies to how much IHT your PET attracts and the personal allowance reduction would stay for the full 7 years.
Assuming no 28/10/26 changes.
I have explained multiple times but Panamax is yet to get their head around how and when IHT Taper Relief applies. Knows something but often states things that aren't quite right. But won't accept it...So, although there is no IHT due on the amount of the PET up to £325,000, you are reducing the amount of your personal allowance.
That may affect how much IHT is due on the rest of your estate.
I presume the taper only applies to how much IHT your PET attracts and the personal allowance reduction would stay for the full 7 years.
Assuming no 28/10/26 changes.
What you highlight is what they're misunderstanding. IHT Taper Relief only kicks in on the amount gifted in excess of the available Nil Rate Band. If it's within the NRB you either live for 7 years and it's out or you don't and it uses up your NRB, consequently making more of your remaining estate subject to IHT. In short, no IHT saving until the full 7 years have elapsed on sums under £325,000 per person.
Also, it depends on what kind of trust it is as to whether there's any tax when creating a trust.
Gifts into an Absolute/Bare trust are PETs so regardless of size there's no IHT on entry.
Gifts into most other trusts, like discretionary ones are Chargeable Lifetime Transfers so amounts over £325,000 per person are subject to a 20% charge on the excess when it's setup.
Have asked Panamax not to state 'facts' so boldly as it can mislead people. Remains ignorant!
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