I own a second home in Cornwall that I bought 25 years ago. I am aware there are likely to be changes in the October Budget that could significantly raise tax liabilities arising from the house. Before this happens, I plan to transfer half of the property to my adult son who already spends a few weeks there each year and to whom I was planning to leave the house. I would, however, like to continue to spend a few weeks there each year myself. Will this cause any issues with HM Revenue & Customs? Does my son also need to pay for the ongoing maintenance of the house for it to be valid?
Stephen Kenny, head of private clients at audit and accountancy firm PKF Littlejohn, says this is a common question as speculation has grown over the Budget. When taxes are expected to increase, people are keen to lock in the current rate. In these circumstances, it is particularly important to make sure that your arrangements will work for you in both the short and long term.
Suppose you own the property until death, which seems to be your intention, the property would be subject to inheritance tax (IHT) of up to 40 per cent (after any available nil-rate band). For capital gains tax (CGT) purposes, your son would be deemed to acquire the property at market value upon your death.
If you sold the property, you would currently pay CGT at 24 per cent. The taxable gain would be based on the market value of the property, minus the cost and any capital enhancement.
Many people believe the chancellor will increase CGT to 45 per cent in the Budget on October 30 so that it is aligned more closely with income tax rates. If the government wants to raise more from IHT, it may consider raising the 40 per cent rate at which it is paid, lowering the threshold, or removing some of the exemptions.
So what does this all mean for you? A gift to your son, under current rules, will be treated as happening at market value for CGT, as you are connected according to tax law. The taxable gain is likely to be significant as you have owned the property for 25 years. With property transactions, tax is due 60 days after completion. Will you have sufficient cash reverses to fund this? If you have to dispose of other investments, this may trigger more capital gains and tax charges.
Assets that are given away are a potentially exempt transfer for IHT purposes, which means that the gift will usually fall out of your estate for IHT if you live for at least another seven years. However, there are rules to prevent tax avoidance that can apply when you give away an asset and continue to benefit from it. These rules cover “gifts with reservation of benefit” and “pre-owned assets”.
To avoid being caught by these rules, both you and your son must occupy the property and pay your fair share of the expenses. The key point is you must only receive a negligible benefit from the property. If you and your son can equally occupy the property and pay your fair share of expenses, you should be within the co-ownership exemption and outside the “gift with reservation of benefit” and “pre-owned asset” rules.
It is also worth considering the effect that ownership of the property might have on your son. Does he already own a family home? If not, when he looks to purchase one, his interest in the Cornwall property could increase the stamp duty land tax he will pay on a purchase by 3 percentage points, as he will already own a major interest in another dwelling.
Should I seek a prenuptial agreement?
As a tech start-up founder, do I need a prenuptial agreement before I get married? What do I need to consider?
David Lillywhite, partner at law firm Burgess Mee, says yes, you do, and it makes sense to start thinking about this in both a personal and professional capacity as early as possible. A properly planned and executed prenuptial agreement can provide much more certainty and clarity (to you and your partner, in every sense) by recording the financial provision you wish to make for each other should your marriage or civil partnership break down. Most importantly, it can clarify your respective understanding as to what will happen to your interest in your company.
While pre-nups are not yet legally binding in the UK, provided that certain safeguards are satisfied, they will be highly persuasive to an English court, which will normally need a good reason not to uphold their terms.
FT Money Clinic podcast
Newly weds-to-be Steve and Georgina, who explain why they decided on a pre-nup and how they navigated the tricky conversation around it. Listen here
That said, although there is nothing inherently “unfair” about an agreement trying to ring fence non-matrimonial assets, an agreement that leaves one party in a position of real need is more likely to be susceptible to challenge as the court has wide discretion when attempting to achieve fairness under the current system.
As part of any forward planning, it is common to include clauses in an agreement that would trigger a potential review in the event of any material change in circumstances. Ordinarily, this might cover long-term periods of ill-health or the birth of any children to ensure that the provision set out in the agreement does not leave one party unable to meet their needs. However, you may also want to cover off any anticipated stages in your company’s lifespan (such as further rounds of funding, an IPO or stock grants) that might increase the value of your interest. While it is impossible to plan for every eventuality in the life of your company or relationship, there may be some imminent events that you can incorporate now.
Our next question
My mother recently died and while she has a valid will, we are concerned over her choice of executors. They don’t seem to be doing anything, take an awfully long time to respond to any questions and, when we speak to them, they do not seem to have a full grasp of my mother’s estate. Is it possible to question the decision-making of those executors or have them replaced entirely (which we suspect they would welcome)?
From a company perspective, a prenuptial agreement can include confidentiality clauses, to preserve any commercially sensitive information. Future investors may also take comfort in the fact that their investment is insulated — as far as possible — from the impact of a separation upon the management of the company: in other words, the prospect of an ex-partner suddenly having the ability to take a much more active voice in the running of the business.
As part of the discussions surrounding a pre-nup, you and your fiancé will be discussing your values and exploring what is important to you to protect and why. These agreements often have a stigma about being “unromantic” but they can be very emotional documents. Founders will want to have the freedom to make the changes they want and take the decisions they need for the success of their business, unfettered by the possibility of separating from their partner at a later date.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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