News and Events

Property letting for retirement income just got easier

  • Posted

In the last decade property became an asset of choice for many people looking to finance their retirement. Many people, even those with just one or two properties, now receive a reasonable income to boost their pension.

However, many of these ‘property pension landlords’ now find themselves in a financial dilemma, as with the rental income they have enough to live on, but would also like to pass on the property to their heirs. However, they can’t afford to give the property away as they need the rent that it provides.

The good news is that things may have become a little easier.

In 1986, HMRC introduced rules to prevent people dodging inheritance tax and stated that if you give an asset away whilst retaining a benefit, the value of the asset remains in your estate on your death. This was known as a Gift with Reservation of Benefit. 

However, it was possible to circumvent the Gift with Reservation of Benefit rules and as a result the government introduced a supplementary tax – the Pre-Owned Assets Tax (POAT). POAT meant that the user of an asset is also subject to a benefit in kind income tax charge. The good news for landlords is that, whilst this tax applies to owner-occupied properties, it does not apply to let properties.

This presents a number of opportunities for landlords, in particular sharing arrangements where a large percentage of the property’s value is given away, but all (or most of) the rental income still remains.

As a landlord, you can benefit from changes to the ownership of the property. This includes arrangements to create a long leasehold (i.e. virtual freehold) interest that only arises several years in the future – perhaps up to 21 years from now. For those 21 years you remain entitled to all the benefits of freehold ownership, including rental income, while your beneficiary has to wait until the lease comes into effect. But when it does, your beneficiary has acquired much, if not all, of the capital value.

It is important to note that these types of deferred lease arrangements are more complex in terms of the legal documentation and therefore require specialist legal advice to ensure they do what you want them to do. 

There are of course hurdles to overcome, such as capital gains tax, but with careful forward planning it is possible to meet these challenges successfully.

Finally, there are some inheritance tax considerations that are unavoidable: you still have to survive seven years in order to escape the IHT net completely and, as with POAT, legislation could be introduced meaning the IHT situation for landlords could change. Ideally, you need detailed advice from advisers who can help you through the sometimes complex web of IHT planning.