Answer by Frederick Bjørn, Private Client Partner at Payne Hicks Beach, originally published online by

Financial Times on 11 November 2020 and reproduced with kind permission

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11/11/2020 How can we reduce the tax burden on a flat given to us? | Financial Times

Opinion Inheritance

How can we reduce the tax burden on a flat given to us?

My two siblings and I will inherit a property in Mumbai on our mother’s death

LUCY WARWICK-CHING

© FT montage; Alamy

Lucy Warwick-Ching YESTERDAY

My two siblings and I stand to inherit a property in Mumbai, India, on

our mother’s death. What are the inheritance tax implications and how
might we reduce the tax burden? If we were to sell the property, could we
set up a family limited company and pay ourselves a periodic
income?

Richard Jameson, private wealth partner at Saffery Champness, says the

inheritance tax (IHT) implications for your mother’s estate will depend on her
domicile status when she dies.

Your mother will have inherited a “domicile of origin” usually from her father when
she was born, but she may have acquired a UK “domicile of choice” if she came to the
UK as an adult and is living here permanently or indefinitely. If she is domiciled in
the UK when she dies she will be liable for UK IHT on her worldwide estate above her
available nil-rate band of up to £325,000 at 40 per cent.
However, if your mother is Indian-domiciled, she will not be liable to pay UK
inheritance tax on her non-UK assets. There is currently no inheritance tax to pay in
India, although this is under review by the Indian government.

The situation is more complicated if your mother has been resident in the UK for
more than 15 out of the past 20 years. In this case she may be domiciled in both the
UK and India. This means that rules of both jurisdictions could apply to her estate,
and the executors would need to consider the UK-India estate tax treaty. This
international treaty overrides the UK’s deemed domiciled rule, so that your mother’s
non-UK assets, such as the Mumbai property, may not be caught by IHT on her
death.

In terms of reducing any potential IHT exposure your mother could consider gifting
the property to you. If she survives seven years from the date of the gift, it would fall
outside her estate. If she does not survive seven years, the “failed” gift falls within her
estate but is subject to a taper relief. A gift of the property is likely to be a disposal for
UK capital gains tax purposes if your mother is resident in the UK. There would also
be restrictions on your mother’s future use of the property in order for the gift to be
effective for IHT purposes.

You should also check the Indian tax treatment on the gift as the Indian capital gains
tax rules are different, and there is also a tax on certain gifts.

If you and your siblings sell the property, you would be subject to UK capital gains tax
at 28 per cent on any gain above the value of the property when it was gifted to you. If
you use the sales proceeds to invest in a family company, this could be a useful way to
manage your future investments. The company would pay corporation tax on its
income and capital gains, and you would pay further tax when drawing a salary or
dividends. This can mean that the overall effective tax rate is higher than holding
some investments personally.

Although family investment companies provide a number of non-tax benefits, HM

Revenue & Customs is actively reviewing these structures and care is required when
setting them up to ensure there are no adverse tax consequences.

Frederick Bjørn, partner in the private client department at Payne Hicks

Beach, says the tax implications and options available require an analysis of your
mother’s tax profile and local Indian law and so would need analysis in both
jurisdictions.
The IHT position depends on your mother’s tax domicile at the date of her death. If
she is UK domiciled (or deemed domiciled — having been resident for 15 of the past
20 tax years) the Mumbai property would ordinarily suffer IHT at 40 per cent. If she
is not, then only her UK situated assets would be within the IHT net. However, the
position may be different if your mother is domiciled in India, due to the UK/India
Estate Tax Treaty, which provides that in prescribed circumstances an India-
domiciled person is only liable to IHT on UK-situated assets, regardless of her period
of UK residence.

Frederick Bjørn, partner at Payne Hicks

Beach © Handout

It would be possible for your mother to gift the property to you during her lifetime. If
she is non-domiciled, there will be no IHT to consider. If she is domiciled, she would
need to survive seven years from the date of the gift for it to be outside of her IHT net,
and she could not retain a benefit from the gift (although depending on how the
property is used, it may be possible for her to give away only a part share in the
property without falling foul of the reservation of benefit rules).

A gift is classified as a disposal and as such your mother would be liable to capital
gains tax on any gains unless she can claim the remittance basis — an alternative tax
treatment that is available to individuals who are resident but not domiciled in the
UK and have foreign income and gains. This would mean she pays UK tax only on
the income or gains she brings into the UK.

If the property were sold, you could use the funds to establish a family limited
company (FLC). This is a bespoke private company set up to accommodate a
particular family’s individual circumstances. It can be funded with share capital
and/or by loan and the directors and shareholders can all be family members.

FLCs are liable to corporation tax on their profits at 19 per cent. If profits are retained
and reinvested, this effectively allows individuals to invest for the long term at
company rates. If profits are distributed, in order to pay a periodic income, they
would ordinarily be taxed to income at dividend rates but could potentially be tax
free, as a loan repayment.

FLCs are also popular as a generational planning tool because different share classes
can be used to pass value to children, without giving them immediate liquidity and
while retaining control.

There is a cost to setting up and running a FLC, and there are reporting requirements
to consider, but these are generally outweighed by the fact FLCs pay corporation tax
and can set management expenses against profits.

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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