Inheritance Tax and Capital Gains Tax mitigation

Background

Michael has a large estate of £8 million and had an Inheritance Tax liability of £3 million.

He also has a large portfolio of residential Buy-to-Let properties, which he owned personally; these properties, therefore, had both Capital Gains Tax consequences as well as Stamp Duty issues to consider. The income generated from the properties and investments created an annual income tax liability of £100,000 per annum.

He sought professional guidance in order to manage the tax consequences of his large estate and portfolio of properties.

What did we do?

We recommended that Michael convert the ownership of his residential properties into a Limited Liability company, using Gift Hold-Over Relief and Stamp Duty allowances; the ownership of the properties was therefore converted with no tax consequences.

This meant that Michael reduced his personal income tax liability. Instead, he now pays Corporation Tax, which is at the much lower rate of 19%.

Michael was then able to control his earnings and opted to be remunerated by way of a small salary and dividends. As an employee, Michael is now also able to make substantial pension contributions of £40,000 per annum; paid by the company as a tax-deductible business expense.

The results

As a result, Michael was also able to give dividend shares to the beneficiaries of his estate and create loans to family members; something that was important to him.

He is able to gift capital shares to family members or gift the shares to a Family Trust; seeing as the business is a tradeable business, the gift of shares to a trust is immediately outside of Michael’s estate, which saves £3 million in Inheritance Tax.