To investors, U.K. land and inheritance tax structures can be a golden opportunity.
Most UK investors in land and other assets wish to minimise the tax burden to their heirs. There are means to accomplish this — and to realise tax deductions.
Taxes on land investments in the U.K. are unquestionably complex, as much as they are in most parts of the world. Part of the country’s history with real estate includes intentionally attracting outside investments (from non-citizens and non-residents) as a means of furthering investment and development.
The country’s Inheritance Tax (IHT) structure has been in place since 1986, and includes a spousal exemption that hinges on a transferable nil rate band policy. It allows for surviving spouses and civil partners to receive up to 200 percent of the nil rate band, from which they can distribute asset value (or cash) to relatives. The nil rate band is adjusted for inflation, last established for the 2010-2011 tax year at £320,000 and will be reconsidered for increase in April 2015. Up to that amount the tax is 0 percent, while value above it proceeds are taxed at 40 percent.
Following is a collection of how the tax structure affects land investors, starting with rules that apply to inheritances:
• For UK residents, taxes apply to inheritances of UK land, as well as property income, gains and transactions of real property. This can include rental income from property, profits, rent and capital gains.
• Non-residents of the UK are not subject to a tax on capital gains from UK assets, including land.
• “Moveable” (non-land) and “immoveable” (land and mortgages) investments are treated separately under UK inheritance tax statutes. Upon a landowner’s death, where the property is located falls under the rule of lex situs (laws that apply to the location). Even if the deceased had lived in France for ten years, his or her land in the UK is taxed according to UK statutes. Only the moveable assets (e.g., art, jewelry, securities outside of the UK, etc.) are free from UK IHT.
• Marriage does not make the spouse an automatic co-owner of the property of the property. Only if the spouse is written into the property title does he or she continue to own it without paying IHT upon the death of the other spouse.
• A landowner can give away land, within limits, while still living as long as it is not done to avoid the claims of creditors. All rules regarding IHT transfer taxes apply.
Some applications of real property actually result in tax deductions. For example, gifting of farmland under the provisions of the Agricultural Property Relief can provide tax deductions for the benefactor in the tax year in which the gift is made. Donations of assets including real assets such as land to a UK-registered charity can also provide deductions to the benefactor. Individuals who elect to sell property to a home reversion plan, an Equity release scheme, are allowed to write the income stream proceeds into a trust for beneficiaries by way of a life insurance policy.