Significantly shrinking the value of an estate

Significantly shrinking the value of an estate

Death duties can significantly shrink the value of an estate.

It’s a good tactic to invest in a range of asset types, as well as in different regions of the world. Spreading your funds in this way offers a solution to the risk of losing value if a particular market or asset class under-performs.

By way of example: “If an investor’s portfolio is heavily weighted in insurance shares, the impact of serious weather events, such as the storms in Europe, could be devastating for the overall performance of the portfolio,” explains John Doidge, the Chairman of the Geneva Management Group (GMG). On the other hand, with a mix of investments, the investor can cope more easily with the effect of the poor performance in one sector.

“Real estate should be included in an investment portfolio as it generally provides good returns over time,” Doidge explains. “And for investors needing a currency hedge, investing internationally is a particularly good option, as one then benefits from both capital growth and rental income in a foreign currency.”

One consideration that investors do not always take into account is the potential death duty impact of this asset class when the investor passes away. Owing to capital growth in property, the asset may be worth a substantial amount by the time the investor dies, potentially resulting in large death duties liability.

On this note, the UK, in particular, has experienced significant house price increases in recent years – as much as 17% over the past two years. In fact, the National Association of Estate Agents and the Association of Residential Letting Agents predicts a 50% rise in house prices by 2025, despite the market having slowed now in anticipation of Brexit.

“Inheritance tax can significantly shrink an estate’s value, leaving heirs with less than they should inherit,” Doidge warns. “This is a tax calculated on the value of property. In the UK, the charge is 40% of the value of the assets.”

Doidge points out that, “While there have recently been changes to the UK Inheritance Law, these offer some relief for owners of residential property, but the situation remains unchanged for the property investor.”

For this reason, it is important to put a suitable plan in place for the acquisition of real estate – prior to buying into this sector. “There are tools available to lessen the tax consequences that could arise,” Doidge explains. “Most importantly, the planning should be geared around structuring one’s investment so that the impact of inheritance tax can be avoided or, at least, limited.”

According to Doidge, “Investing in real estate can be done in a variety of ways, and an investor should consider all options. Buying a property yourself involves collecting rent and maintaining the building. On the other hand, you can put your funds into a property investment scheme, like our GMG Real Estate division offers. We will identify suitable properties across commercial, industrial and retail sectors. You will benefit from both rental income and a share of the capital value if we sell the property, with no responsibility for it.”

Doidge also offers this cautionary advice: “Where an investor previously acquired commercial property held in an offshore trust, this should be reviewed since the loophole this used to provide to reduce inheritance tax liability has now fallen away.”

Those with an interest in investing in property should consult an expert in financial and estate planning before beginning on this investment path. That way, the potential ravages of taxes arising on death can be avoided.

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