Mr and Mrs Chana have spent their working lives building up a small portfolio of five rental properties which they use as a source of income rather than relying on their pensions.
Mr and Mrs Chana were aware that they were in for a large Inheritance Tax Bill on their estate after they die as residential properties do not qualify for any Tax reliefs.
The biggest issue was that they both relied on the rental incomes for their day to day living needs and as such needed a way they could both manage their inheritance tax burden but retain an income.
After commissioning a report to look at all of their options they decided to follow expert advice and set up a Family Partnership with their children to control the impact tax would have on their estate.
The property partnership would be made up of both Mr and Mrs Chana as designated members or senior partners, and their children as junior partners. We would also then include a pair of Discretionary Trusts as further partners. The first step would be to transfer the ownership of their buy-to-let portfolio into the partnership and the value would then sit on their capital accounts within the partnership accounts. This is not a disposal for CGT purposes. At the same time, the other partners and the Trusts would have a zero balance on their capital accounts.
The object of this exercise is to move the value off of Mr and Mrs Chana’s capital accounts and onto the capital accounts of the junior partners and the Trusts, thereby lowering the value of Their estate for IHT purposes as those values will now sit with the junior partners.
We use a Discretionary Trust because we are able to elect hold-over relief when transferring an asset into it. This way the Trusts will allow us to move more of the property values out of their estate at a faster rate, without triggering a capital gains charge. We are limited to moving £325,000 of value into a Discretionary Trust in any seven-year period without triggering a tax charge. As we have two in this partnership, we can move up to £650,000 in any seven year period.
We will also be able to use their annual allowances for capital gains to make annual movements of capital out of their estate as well.
This means that in every seven year period we would look to reduce the IHT liability of the estate by at least £260,000.
Partnership law states that there does not have to be a relationship between capital and income within a partnership; therefore, despite the fact Mr and Mrs Chana will move the capital value of the properties out of their capital accounts and over to the junior partners and the Trusts, they, as the senior partners, can continue to earn a majority of the income generated by the business.
The other partners must earn some of the income so we suggest a minimum of 1% be paid over to each of the other partners. The actual amounts paid over will be decided on an annual basis by the Chana’s and will be done to suit their needs and lifestyle.
In some ways, a family investment LLP acts very like a Trust, with the older and wiser heads looking after the wealth of the more vulnerable members. Unlike a Trust, there’s no automatic lifetime charge to IHT when the properties are transferred in, even if those properties are worth more than the IHT Nil Rate Band (currently £325,000); nor is there a ten year IHT charge levied at 6% on asset values in excess of £325,000.
A family property LLP is a flexible business structure that has tax advantages over direct ownership, a family company or a Family Trust. Partners can divest themselves of capital value whilst still having flexible access to income by way of the deed, rather than by way of ownership of the asset. Income and capital allocated to each person is flexible so Care Fees and other asset protection issues can be addressed.