Gifts of Second Properties

These days it is not uncommon for individuals to own second properties such as a holiday home either in the UK or abroad.

It needs to be borne in mind that when considering making a gift of assets for Inheritance Tax (IHT) purposes there is a general requirement that the person making the gift should not derive any continuing benefit from the asset(s) given away. Alternatively, they may pay a market rent to the extent that they continue to benefit.

What is often overlooked is that the cost of the rent involved is small in comparison to the capital value invested. For example, take the holiday cottage in Cornwall with a capital value of £200,000 and which is occupied for 6 weeks of the year by the owners mostly out of season. The potential additional IHT liability created by retaining the property in the estate is £80,000. The annual market rent of the use may be in the region of £3,600.

If the property was transferred onto trust for the intended beneficiaries then, subject to the usual 7 year survivorship requirement, the IHT liability may disappear. The rental income paid in the meantime could be used to offset expenses in relation to the maintenance and general running of the property. Are the former owners any worse off in reality?

The use of a trust structure through which to effect such a gift also enables any Capital Gains Tax, otherwise arising on such a transfer, to be “heldover” into the hands of the trustees. Control over the use and sale of the property can also be retained through a trust structure.

Authors Robert Arnold ( Source IFA ) and Andy Kirby (Moore Blatch Solicitors)