Thinking of leaving your UK properties for your kids? Don't forget about Inheritance Tax!

While having a chat with fellow investors in the London Property market, one said, "I am buying my London Condos to leave them for my grand-kids!"  This congenial chap was on a high because he was 'promoted' in rank not too long ago, i.e. his daughter just gave birth to his first grandkid.

Nice Thought - But What About Inheritance Tax?
My response was that this was a very nice gesture, however, our plans were to liquidate our London properties completely, by the time we were 65 or maybe a bit earlier since we can't fully predict how long we will live.

Why?  The answer is UK Inheritance Tax.

The Basics of UK Inheritance Taxes
The UK HMRC Website has comprehensive information here.  I shall just highlight the main points..

Scope of Inheritance Tax
Inheritance Tax (some countries call this Estate Duty) is usually paid on an estate when somebody dies. It's also sometimes payable on trusts or gifts made during someone's lifetime.

Definition of Asset 
What constitutes assets of an estate?  Assets are anything that has a value, such as:

"money in bank, building society or savings accounts houses and land, including farmland businesses, or business assets owned by the deceased, investments such as stocks and shares, including family shares personal belongings, including jewellery, antiques and other collectibles furniture, fixtures and fittings in a house motor vehicles pensions that include a lump sum payment on death, assets in a trust from which the deceased benefited payouts from life insurance policies foreign assets held abroad including foreign bank accounts, property or shares." (from UK HMRC website)

Take note that any asset given away within 7 years of the person's death will also fall into the scope of UK Inheritance Tax. 

Oh, you mean the UK Tax Authority will tax Singaporeans on all the above assets?  Fortunately not.  

As long as you are not domiciled in the UK, the Inheritance Tax will only apply on your UK assets.  Put in another way, if you are domiciled abroad, inheritance tax applies only to your UK assets. 

Inheritance Tax applies to your UK assets only, if you are non-domiciled in the UK

Phew!  So, the point here is that for overseas investors, you are likely to get hit with Inheritance Tax only on your UK assets and not your assets elsewhere in the world. 

Inheritance Thresholds in UK 
The threshold is £325,000 in 2014 to 15. The tax is payable at 40% on the amount over this threshold, generally speaking.   The estate has to be valued after the person has passed away.

For land and buildings, the executor needs to get a professional valuer to get an accurate valuation that reflects the value at the time of the death.

To make sure you get an accurate valuation, you should use a professional valuer. The valuation should reflect the value at the time of death.

How Much Inheritance Tax Do You Have To Pay If You Gift Properties To Your Kids? 
Let's use a simple example.  You have just one Battersea Condo, full paid up, worth £2Mil.

1 X Battersea Condo valued at £2Mil

Total value subject to tax = £2,000,000 - £325,000 = £1,675,000

Tax Payable = 40% of £1,675,000 = £670,000

Very pricey properties!

What? How is my Kid Coming Up With £670,000?
I don't think the HMRC will give you interest free instalments.  Tax to be paid up in full upon demand. So either your kid coughs up the £670,000 in cold hard cash or sell away the property to raise the cash.

Sounds dire?  Very much so.

I highly doubt that the UK will remove her Inheritance Tax structure anytime in the future.  Therefore, with such a punitive 40% rate in place, I think the best approach is to sell off all our properties more than 7 years before we pass on.

Hold On... How About Buying Properties Using Corporate Vehicle? 
The idea here is to set up a company (usually in one of those tax havens like British Virgin Islands), and use the corporate vehicle to purchase properties in the UK.  Apparently many rich overseas investors do this, especially the Russians.  Doing so will avoid revealing the true identities of the owners of the properties, at least it takes a lot more work to find out the owners.

Perhaps in the past this was a viable option.  However, the UK Government has started to clamp down on this approach, not least by imposing a punitive 15% Stamp Duty rate on all properties purchased by a corporate envelope worth above £500,000 - see this article.

Anyway, I am no expert on using corporate vehicles to buy properties.  If you have comments on this topic, do contribute your views on our community forum!

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Happy Investing!