For most property investors, especially those who have large portfolios, IHT planning is of utmost importance. SPVs are a good way of managing IHT efficiently. Although SPVs are used in property investment to protect assets, they can be used to play a key role in reducing inheritance tax liabilities. In this article, we’ll explain how SPV share purchases can help with inheritance tax planning, providing clarity on how they work and why they are an effective tool.
What is an SPV?
An SPV is a corporate body created with the intention of being used for one purpose, be it property investment or development. For property investors, SPVs have the added benefit of segregation of personal wealth from business investment, thus preventing risk and financial management. SPVs are commonly limited companies that have a distinct legal personality distinct from that of the shareholders-investors.
Buying a property through an SPV gives the investor the opportunity to hold shares in the company rather than owning the property directly. This has several benefits, including tax efficiency, asset protection, and providing an avenue for inheritance tax planning.
How SPV Share Purchases Help with Inheritance Tax Planning
Inheritance Tax is charged on the value of an estate above a certain threshold, currently £325,000 for an individual in the UK, with a residence nil-rate band of up to £175,000 for those passing on a family home. If the estate is worth more than these limits, the excess is taxed at 40%. However, there are strategies to reduce this liability, and purchasing shares in an SPV can play a significant role in this process.
1. Decrease the Value of the Estate
One of the primary areas in which SPVs can help in inheritance tax planning is by lowering the total value of an estate. The concept is such that owning property in an SPV means there is no direct holding of such property in a person’s name; the company owns the property. As a result, the value of the asset is the share in the SPV, while these shares usually happen to be several times less in value than that of the real property.
For instance, if you acquire ownership in property through an SPV, then your estate would be liable to inheritance tax on the value of the shares which you held in that SPV and not the entire value of the property. If the shares of an SPV are passed to beneficiaries, this can significantly reduce the taxed estate which subsequently reduces the inheritance tax payable.
2. Business Property Relief (BPR)
In the UK, Business Property Relief (BPR) gives an exemption on certain business assets for inheritance tax up to 100%. These shares in a trading company or a company that has qualifying business activities qualify if the company fulfills the given requirements.
Most SPVs holding property for investment will qualify for BPR, particularly where they are really managed or developed. Inheritance tax is very often reduced upon the holding of shares in an SPV where BPR applies and shares will therefore completely avoid inheritance tax.
3. Transferring of Shares for Decreasing the Value of the Estate
Another strategy for lifetime gifting is to gift shares in the SPV to the heirs. Thus, the worth of the estate is reduced while, over the years, causing a huge deduction in inheritance taxes. The gain of gifting shares is their tax efficiency at transferring wealth where control of property assets is sustained.
It reduces the value of shares in your estate when you transfer shares of an SPV to family members. This should also reflect in your inheritance tax liability when you die. Gifts during your lifetime are also exempt-to some annual allowances to the possibility of taper relief for gifts more than seven years before death. This can help safeguard future generations against inheritance tax because the inheritance tax is brought down.
4. Flexibility and Control
Flexibility and control is yet another significant benefit which you may attain while using SPVs in inheritance tax planning. You may make an SPV structure of your estate whereby you have the freedom to determine the way in which your assets are distributed when you die, and you get to ensure you achieve your desired intent. You can elect who will enjoy the shares of the SPV, or appoint the shares of the SPV to a trust; thus you will have total control of assets and, concurrently, decrease your estate’s worth. Contact us for more info on SPV share purchases.
5. Planning for Generations
You can use the purchase of shares in an SPV as a way of creating a long-term financial security structure for your children or other beneficiaries. The growth in the value of the shares in the SPV could mean growing wealth for future generations, while the inheritance tax liability is kept low. Lastly, when you pass on shares, IHT exposure on them is reduced; thus, building a legacy with less tax implications for you.
Share purchases in SPVs are probably one of the most effective tools in inheritance tax planning, which would significantly benefit property investors looking to minimize their tax liabilities. Using SPVs, the separation of property ownership from personal assets can qualify for Business Property Relief, facilitate gifting shares, and set up a flexible estate structure where wealth passes on to future generations with minimal tax exposure.
