It is never too early to think about planning for the future of your wealth. If you own a property and are exploring options to pass it on to your children or grandchildren while minimising their inheritance tax (IHT) liability, a concessionary purchase might be the solution.
Concessionary purchases have gained popularity among individuals seeking to optimise their financial planning, particularly regarding IHT and Stamp Duty Land Tax (SDLT). This article explores the concept of concessionary purchases and how they can be a valuable tool in reducing tax liabilities and securing wealth for future generations.
Understanding Concessionary Purchases
A concessionary purchase occurs when a property is sold at a price below its market value, often within a family. The seller, typically a parent or grandparent, may choose to offer the property at a reduced rate to transfer wealth to the buyer, usually a child or grandchild. These transactions can be legally structured to provide both parties with financial advantages, especially in the context of tax planning.
Benefits for Inheritance Tax planning
Inheritance Tax is a tax levy on the estate when a person dies. The current threshold for IHT is £325,000, with anything above this amount potentially taxed at 40%. Concessionary purchases can be a strategic way to mitigate this tax burden and offer several advantages for IHT planning:
Reducing Estate Value – By selling your property at a reduced price, you can lower the value of your estate, potentially reducing the overall IHT liability.
Leveraging the Seven-Year Rule – If you live for at least seven years after making a concessionary purchase, the property value at the time of the sale is typically not included in the IHT calculation. This allows for a significant asset transfer incurring IHT.
Benefits for Stamp Duty Reductions
SDLT is a tax on property transactions, typically paid by the buyer. In the UK, the amount of SDLT payable is based on the purchase price of the property. In addition to IHT advantages, concessionary purchases can help reduce SDLT liabilities:
Lower Purchase Price – SDLT is calculated based on the purchase price. Buying a property at a concessionary rate can reduce the SDLT owed. For instance, if a property worth £500,000 is sold for £300,000, the SDLT would be calculated on the lower amount, potentially saving the buyer thousands of pounds.
First-Time Buyer Relief – If the buyer is a first-time purchaser and the property is sold at a reduced price, they may also qualify for first-time buyer relief. This will further reduce their SDLT liability and can be particularly advantageous for younger family members entering the property market.
Example Scenario
Mr and Mrs Smith, aged 65 and 70, have a property valued at £1.2m that has been in the family for over 30 years. There is an outstanding mortgage of £600,000, and they wish for the property to pass to their granddaughter Sophie and her partner. They do not have the funds to repay the mortgage themselves but wish to gift the equity to Sophie.
Sophie and her partner are able to purchase the property from her grandparents at a purchase price of £600,000, also allowing them to benefit from the first-time buyer SDLT relief. The equity of £600,000 is treated as a gift and subject to IHT, however, this is also tapered, in the instance the grandparents do not survive the seven years, after which the gift will be exempt from IHT.
Concessionary purchases can be a strategic approach to inheritance tax planning. By understanding the benefits and potential implications, individuals can explore this option to minimise tax burdens and ensure a smoother transition of wealth to future generations. It’s advisable to consult with a financial adviser or tax specialist to tailor a plan that aligns with your specific circumstances.
To learn more about how concessionary purchases can benefit your specific financial situation, please contact Henry Dannell. Our specialist team of advisers can provide personalised guidance and help you develop a tailored solution.
Please note: We are not tax advisers. Our advice relates to the insurance policies used to cover such liabilities, which should be validated by a relevant professional. Please also note, the Financial Conduct Authority does not regulate will writing, inheritance tax planning, and trust planning.
