The estate planning checklist for UK house buyers

Buying a property means more than the simple acquisition of bricks and mortar. With it should come thorough consideration of the relevant UK taxes which will apply including Inheritance Tax, Capital Gains Tax and Stamp Duty Land Tax, together with an appropriate Will. Taking advice at an early stage in the purchase process can mean the difference between meeting your objectives in the most tax-efficient way possible or a nasty surprise from HM Revenue & Customs in the future.

Inheritance Tax

This is due at 40% less than the current nil rate band exemption of £325,000, together with any other available allowance (e.g. spouse exemption). For those settled with their permanent home in the UK, 40% is due on the value of worldwide assets while international clients are liable only on UK assets.

Inheritance Tax can be reduced by way of an appropriate interest-only mortgage, but this needs to be implemented at the time of the purchase. Additionally, any lifetime gifting or family loan arrangement needs to be structured appropriately to avoid anti-avoidance rules such as those relating to “Gifts With Reservation of Benefit” (GWROB) or “Relevant Loans”. A GWROB means the value of property given away remains in your taxable estate. A Relevant Loan can produce an unwelcome liability to Inheritance Tax for such a well-intentioned creditor - often a family member with no other connection to the UK - as well a liability for the debtor for the value of equity in the property.

No UK Capital Gains Tax is charged on sale of a “main residence”. However, there are conditions on whether a property qualifies as a main residence which should be checked and not assumed. There may also be tax consequences in other jurisdictions; for example, US citizens are only exempt on the first USD$250,000 of capital gain and only if other conditions are met.

Stamp Duty Land Tax

The additional 3% SDLT surcharge on purchases of second homes as well as the additional 2% surcharge for non UK residents can provide a strong impetus to structure a purchase in the names of family members; particularly if such persons are the intended recipients of the property in any event, whether during lifetime or on death. However, no estate-plan should be driven solely to avoid one tax as this can produce a greater liability to other taxes such as Inheritance Tax or Capital Gains Tax. The best solution is one which considers all relevant taxes in the round.  

Declarations of Trust

If property is being purchased on behalf of another or by two or more persons in unequal shares, a Declaration of Trust is recommended to ensure the split of equity is recorded clearly. This can avoid lengthy and costly disputes with family members over whether a gift or loan was intended to assist with the purchase and also can provide invaluable protection and clarification of property rights for cohabitees should the relationship break down.  

English Will

A Will is the cornerstone of any good estate-plan. It ensures property is gifted on your death in accordance with your wishes, rather than prescribed rules of “intestacy” which will apply so that assets can be divided among distant relatives or even to the Treasury. For international clients, a separate English Will dealing with your English property can make the administration of your assets in this country as smooth as possible and can avoid complications which can arise under private international law where there is no Will or a Will is not up to date.

For more information on our estate planning offering please contact Liz Palmer, Simon Malkiel or John Annetts.