By Louise Misiewicz
Are you concerned about current inheritance tax liabilities?
What are the tax planning options for buy-to-let landlords?
I was discussing inheritance tax (IHT) liabilities with a new buy-to-let landlord client this week as part of a new Wealth Planning Review Service, our property tax team now offers – you can read all about this new service in this blog, it was clear that IHT is an area which causes confusion for many property investors.
As I explained to my property investor client during the review, inheritance tax is different from other valuation, as it doesn’t have a standard year of assessment. IHT is typically triggered by a person’s death.
When completing form IHT400, the personal representatives are providing details of somebody else’s assets and liabilities, and they will need to look back over a person’s lifetime to establish certain events for the potential effect on the IHT liability.
This means that the range and depth of information gathered required can be substantially wider than in other tax areas, making IHT something that buy-to-let landlords need to consider carefully when reviewing their tax liabilities within their property portfolios.
It is for this reason that obtaining information from a variety of sources is critically important for property investors when it comes to ascertaining their IHT liabilities. I decided to write a series of blog posts outlining an IHT Toolkit, to help landlords reduce their uncertainty around the subject of inheritance tax.
How important is the form IHT400 for buy-to-let landlords?
The IHT400 form is a critical document for buy-to-let landlords and property investors to correctly complete for inheritance tax assessment purposes, and in my experience it falls largely into four areas of potential risk for investors when it comes to completing the form with a tax-efficient approach.
The first risk area property investors need to consider on an ITH400 is that of omissions.
It is common for assets or gifts to be omitted from form IHT400. I believe, as a property tax expert, that it is important to look beyond the information provided and check the details.
People outside the professional property sector often do not recognise items that need to be included in form IHT400, and in my experience, this can lead to very costly errors when it comes to tax planning.
A good example is that some people do not realise the deceased’s interests in jointly-held property form part of the estate for inheritance tax purposes – even though their share of that property may pass directly to other joint owners on death.
Another example is the need to identify Gifts made by the deceased, including assets such as interests held in Trusts. As I said to my buy-to-let landlord client during our Wealth Planning review, it’s critically important to ask the right questions, beyond the standard one of “what assets did the deceased have”.
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The second risk area that I advise property landlord clients to carefully consider when completing an IHT400 form is around that of valuations.
Valuations can be a huge area of confusion when it comes to completing tax liabilities for IHT purposes. It’s important to fully ascertain the value of assets.
For assets with a material value, I recommend hiring an independent valuer, to make sure that taxes is completed within relevant legislative requirements.
This needs to be considered for houses, land and buildings. I’d also stress that it needs to meet Royal Institution of Chartered Surveyors (RICS) or equivalent industry-accepted standards.
Some issues can be overlooked when instructions are given – for example, the potential for development of land, and the existence of tenancies or occupancy by people other than the deceased.
Copies of relevant agreements, or full details where just a verbal agreement exists, are often not given to the valuer, so misunderstandings can arise. If HMRC are happy that all relevant information has been reviewed by a valuer, they are less likely to challenge any independent valuations given.
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What other areas of risk around IHT400 can impact you?
The third area of risk for property investors when completing an IHT400 form is that of observing the correct legislation around tax liabilities. Every year, HMRC reviews IHT400 forms where the submissions does not meet current legislative requirements.
Keeping up-to-date with legislative changes is not easy, and searching through guidance is time-consuming, as I advised my buy-to-let landlord client during our wealth planning review meeting.
The fourth risk area when it comes to assessing inheritance tax liabilities that many property investors can fall foul of is around record keeping. Good record keeping is essential.
An absence of clear and concise records can mean that information provided is not accurate, and these mistakes are in turn passed on to HMRC. This will also mean an inaccurate IHT liability is in place.
I advised my client that when completing form IHT400 it is the deceased’s records which they are required to obtain and rely on. This can cause difficulties if those records are incomplete.
The type of records which I advised my buy-to-let landlord client to retain include:
- Gifts. Although it is Gifts made within seven years of the date of death which are important, it’s advisable to keep records at all times.
- Lifetime Transfers: Keeping careful and detailed notes and valuations of lifetime transfers, and having access to detailed inventories of assets makes it easier to gather the relevant information to complete form IHT400 correctly.
Next week, I’ll examine Part Two of the inheritance tax toolkit for buy-to-let landlords, and will be providing blog readers with the basic IHT checklist I gave to my new buy-to-let landlord client.
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