It’s all about you

We support you and your business at every stage with expert advice that delivers outstanding results.

We provide accounting, tax and business advice to individuals, family, and owner-managed businesses from across our offices in Leeds, Manchester, Newcastle and York.

This article appeared in the Yorkshire Post, on Saturday, October 3, 2009

The Deferred Lease’ Strategy

Andrew Cowe, Tax Consultant

‘No-one enjoys paying tax, but in recent years Inheritance Tax has proved to be a particularly unpopular charge, and it is easy to see why.  Apart from generally being payable at a time when families are already distressed, it represents additional tax on wealth usually built up only after other taxes have been paid.  ‘Tax on taxed money’ one might say.

Frequently, it is avoided by giving away wealth during lifetime, but then of course there is a loss of control over what has been gifted, and more importantly you can no longer benefit from or live off either the capital or the income it generates.  This is a particular problem as life expectancy rises, and of course you have no knowledge of precisely how long you will live, or what funds will need to be retained to fund your lifestyle.

When the assets in question are rented properties, there may be a solution.  By creating a lease structure and a trust, in the correct circumstances up to double the taxable value may be removed from the estate as compared with an outright property gift. Implemented correctly, the planning will also avoid capital gains tax (CGT), which can arise on family gifts.  Best of all, by specifying a future date upon which the lease referred to above is to commence, it is possible to keep the rents from the properties for a period of up to 21 years (‘the deferment period’).

Creating a lease reduces the value of the freehold in your estate, leaving effectively a right to rents, or other use of the property, for the ‘deferment period’.  The value of this diminishes further as this period runs down and the start date for the lease provisions approaches, further reducing the taxable value in your estate.  At the lease start date, the freehold is of purely nominal value.  In the meantime, assuming property values have once again started to rise (a fair bet over such a long period), such growth is also protected from IHT.

The strategy is ideal for taxpayers who feel a need to keep a measure of control over properties and/or the income arising.  Perhaps there is a feeling that the next generation who would inherit the property are too young to assume free control; perhaps the rents are needed now but a future time can be envisaged when there will be sufficient capital and income from other sources to live off.  Whatever the motivation, the prospect of removing a 40% IHT charge in the event of death, whilst still being able to live off the income, will undoubtedly be an attractive one.

Andrew Cowe is a Tax Consultant with Garbutt & Elliott Chartered Accountants and Tax Advisers, with offices in Leeds (telephone 0113 273 9600) and York (01904 464100).