ASK528: Does this inheritance tax strategy really work? PLUS: Bridging loan vs equity for a first BRR?

0:02Rob B:Hi, I'm Rob. And I'm Rob. And this is Ask Rob and Rob. Hey everyone, welcome to Ask Rob and Rob, the show where you give us your questions, most of the time property related, and we do our very best to answer them well. Let's do that again this week. But before we do, let's give you a very, very quick reminder of how you can get your question onto the show.

0:23Rob D:Yes, you just have to go to propertyhub.net slash ask. It really is that simple. That one link will let you submit a written question for our Sunday Times column, or you can get your beautiful voice on the podcast by leaving us a voicemail. We love it when people do that. And the first person who's done that today is Fred. Hi, Rob and Rob. My name's Fred.

0:40Rob B:Thank you for your help and advice in getting my wife and I started in our property journey. We currently have one house as a buy to let in our own names. We've started a limited company to progress our portfolio. A relative has announced that they are intending to pass us a property, a converted barn, to avoid inheritance tax, with all the caveats that the law applies to this. So my question is, can I get that inherited property signed straight into my limited company our limited company or does it have to go into our own names first if it goes into our own names then we sell it later on to our limited company we'll have to pay the stamp duty and all the fees that go with that your advice on this matter will be greatly received thank you

1:39Rob D:keep up the good work fred thank you for your question now normal caveat we are not tax experts very much suggest you speak to a tax expert. But my understanding is yes, they could do this, but it's probably not a good idea for them. So from your question, my understanding is you're not strictly going to be inheriting the property as in it is left to you when someone dies, but they're planning to effectively gift it to you in advance. So they could gift it to you or they could gift it to the company. Hopefully I've understood your question correctly. Now, the real reason why they would not want to gift to the company is that if they do it cannot be a potentially exempt transfer.

2:19Rob D:That is presumably what they're planning to do with you which is where if they live for seven years after making a gift then there's no inheritance tax. When they're gifting to a company it can't be a potentially exempt transfer there's an immediate inheritance tax hit or if they haven't used their nil rate band yet it'll be counted against that so they won't have to physically pay the tax but it will use up their band whereas if they gifted it to you as an individual then survive for seven years then no inheritance tax and the nil rate band remains unused. Also if they count as a connected person and they're transferring the property to a company then stamp duty will be payable even if they're effectively giving you the property with no consideration being paid.

3:06Rob D:Whereas if they're gifting it to you individually and nothing's paid in return then there wouldn't be any stamp duty. So purely from their point of view then transferring it to your company sounds like it's unlikely to solve their problem because it doesn't save the inheritance tax. Now what they can do of course is transfer it to you personally and then you transfer it to the company later. Now that would be fine for them but then of course then you will have all the normal issues of transferring a property into the company namely primarily the stamp duty that you would need to pay on that transaction.

3:40Rob D:Now you may well take the view that if you're getting a property for free and the best place for it is in a company then you're perfectly willing to pay that stamp duty because it puts the property in the best place for the long term. But all of this like I said is something that you'll need to work out with a tax expert both in terms of the original transaction how does property get to you and then if the property does end up with you personally then is it worth you putting it straight into a company chances are if you are going to do it it's better to do it straight away because then you won't have had any capital gain to deal with it'll just be the stamp duty but very much something you'll want to get an opinion on so fred really interesting question thank you for sending it in and i hope that helps right next up we have a question in from will hello rob and rob my name is will i'm a young wannabe investor from around Sheffield.

4:29Rob D:And one of the reasons why I'm such a wannabe investor is because of your podcast. So thank you for what you're doing. You're helping so many people. And I've now got an urge to buy loads of houses. So a little bit about my situation. I've got an unencumbered property that I inherited. And I've also got a buy to let that I bought last year. That's my first investment that I bought. I'm looking to grow the portfolio quite aggressively using money from the unencumbered property and using bridging loans i'm looking to buy brr projects so things i don't need too much doing to them i'm looking for things that i can buy with cash or bridge at the minute auction properties like my question to you is for the first one should i go with a bridge and pay them expensive fees and all the hidden expensive stuff that comes with it or should i just refinance pull a hundred thousand pounds out of the unencumbered property and just use that and my remaining cash to do it up what would you do in my shoes cheers bye bye well thank

5:27Rob B:you for your question you're in a really good position so understandably you want to get this right and let's try and put you in the right direction if it was me and you were insistent on going down this path and going on this strategy then i would take out equity from your property and use that. Why? Well, the debt, the amount you'll be paying for that debt each month, will be a lot less, a lot less if you remortgage and use equity compared to a bridging loan. And if the project doesn't go as well as you first hope, then you're not in such a tricky position. So what I mean by that is if you take a bridging loan out, you buy, you refurb, and you go to refinance, but the bank doesn't agree with you and doesn't refinance at the level you want, then you may be in a position where not all the bridging loan can be paid off for the equity you look to release.

6:21Rob B:So based on that, I would absolutely look at using equity first. Some people may feel uncomfortable with that advice because they don't like releasing equity to use it to go and buy other things, but every person's different, but you just run the numbers. What I would say is, as this will be your first project, buy a property that you will be happy to own even if you don't extract the numbers out that you want in the end because the real learning happens when you actually do the projects not when you listen to people like me and rob give advice on them so you're going to learn loads and that's a great thing that shouldn't put you off and you will make mistakes again that's a great thing because mistakes then become lessons but because of that do it in a way where the downside is protected use the equity that you've got make sure that the rent and you will be able to predict the rent is enough to cover those costs if you don't extract all the equity out that you want at the end and you'll still have a really good buy to let and you'll still not be in a position that's putting you under financial stress and you would have learned a lot now if that's your worst case scenario i think that's a great worst case so will we wish you the very best of luck and i hope your project goes really

7:29Rob D:well so there you go two more questions answered and like we said at the beginning we'd love to have yours too so do get over to propertyhub.net ask if you've got a question to send our way but that's it for today we will see you back here on thursday for the property podcast until then have a great week bye-bye bye-bye