Many people now own second properties. In some cases it is through inheritance. In other cases the individual may have taken a decision to invest in a property. It could be a holiday home but in many situations the second property will be let out to generate income with the prospect of longer term capital growth.
Those with an appetite for leverage or with their own funds available have built up property portfolios. This has been the preferred investment of many rich celebrities. One thinks of the premiership footballer, Robbie Fowler, in particular. So successful and substantial is his property portfolio that Manchester City fans used to sing “we all live in a Robbie Fowler house” to the tune of Yellow Submarine by the Beatles.
My focus is on those more senior citizens who have, probably by inheritance, acquired one or two properties which are let out. My constituency will also have their own home with the mortgage likely paid off. Such people will not see themselves as rich although they might well concede that they are comfortable and they may not remonstrate too much if they were referred to as affluent. Apart from the property they might have their pensions and some modest savings. They will see it as the just deserts for working hard all their lives. They would rail at being labelled rich by Corbyn and his grisly gang.
Certainly such people would not immediately think that they would have any significant Inheritance Tax exposure. After all, this is supposed to be a tax to hit the rich.
The problem is that the investment property is not a favoured asset for IHT (Inheritance Tax) purposes. If we consider a couple living in the South East, their combined lifetime allowance (currently frozen at £650k) may cover their house and the Residence Nil Rate Band might cover any excess, if they are leaving their house to their children. We should assume that the pension funds are written in trust and other savings are relatively minimal.
A second property is, however, exposed to IHT on the second death. If the property is worth £300k, then IHT at 40% represents a liability of £120k.
Some may be sanguine about the beneficiaries (i.e. their children) just having to pay the tax. After all the children are inheriting significant property and the IHT liability might be seen as a quasi mortgage.
Others may resent the Exchequer taking this cut of hard earned family wealth and will want to see if some action can be taken to mitigate the exposure.
In some cases the challenge can be actually identifying that the problem exists in the first place rather than coming up with a solution. There are many issues to consider not least the fact that the investment property will likely be generating very useful rental income which the couple might be reluctant to lose.
Our Tax Manager, Lucy Orrow, is very experienced in looking at this typical situation and coming up with potential solutions. Please give Lucy a call on 01376 326266 if you would like her to look at your position. Lucy will be able to give details of our costs. We never charge more than the IHT which can be saved from our recommendations.