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AARRGGHH!!!! IHT, CGT & Income Tax. Triple whammy????!!!!!!
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svpelican
Posts: 3 Newbie
in Cutting tax
Hi. This is a bit long winded but if anyone fancies getting stuck into this I would be really grateful for any advice. I've searched for days now and have accrued a lot of info but wanted to check with someone to make sure I am correct.
Situation.
My father passed away in an accident just before Christmas which has left us all shell-shocked. We thought his affairs were all in order but it turns out they are in a total state and we are about to be landed with a huge tax bill.
He left an estate worth circa £650k. This consisted of a property worth £300k, two boats worth £100k in total and £250k in cash.
He left one official will from 1996 where he made my sister and I the sole beneficiaries but then wrote another will in 2007 which we found on his PC but this hasn't been countersigned or witnessed. In this will (and letter of wishes) he asked that the estate provide a property for his other half to live in for the rest of her life (or unless she re-marries). Together with a life insurance policy, £10k in cash from the estate and a flat she owns (which he paid off the mortgage and renovated for her) she was therefore provided for until she meets someone else (she is only 57 so likely to meet another person). At this point when he wrote the will all the cash and assets were in his name other than the house.
The property he lived in when he died was originally a holiday home and was put into a discretionary trust 20 years ago for my sister and I but following a stroke my father sold his PPR and moved into the holiday home with our permission. He then renovated the house in lieu of rent.
When he died we found out he had just put £90k in joint bank accounts with his girlfriend (a dependant, they had been together 15 years) and one of the boats worth around £80k is also in joint names. These are not tenants in common, but joint ownership. There is also a £100k life policy in her name that I believe sits outside the estate for tax purposes. We think the reason he set up all these assets in joint names was because the insurance policy was about to stop.
So thats the background - this is the situation I think we are now in...
IHT in relation to the property.
It is my understanding that as Dad moved into the property 6 years ago (it was never a PPR) and because he set up the trust after 1986 it is to be considered for IHT. I am also led to believe that as he moved into it following an unforeseen change in circumstance (a stroke) and also because he spent a great deal of cash renovating it we may be able to claim that it isn't liable for IHT?
CGT in relation to the property.
As this property was put into a discretionary trust 20 years ago it seems my sister and I are liable for the CGT (in addition to IHT potentially) - I presume only if we sell the place?
Right of residency for his partner.
I want to honour dads wishes and provide a roof over his other halves head but have a horrible feeling that because we are about to be landed with a huge tax bill we may need to sell the current property and buy a smaller one for her to live in. Can she claim a right to stay in the home she has lived in for the last 6 years? She hasn't paid towards anything during that period.
Joint assets.
I think these pass automatically to the surviving partner but as these were all privided using my fathers money (i.e. his cash bought the boat and it is his cash in the bank accounts) they will form part of the estate for income tax purposes.
Income Tax.
As Dad lived in the cottage for the last 6 years I have read somewhere there may be an income tax bill about to appear. I assume this is based on the market rent of the property and would be payable at £40% of the income the estate should have received from him?
At the moment I think the estate could be looking at a combined tax bill of around £200k!!! I'm desperate for any advice on whether this can be reduced at all.
Thanks in advance for your help.
John.
Situation.
My father passed away in an accident just before Christmas which has left us all shell-shocked. We thought his affairs were all in order but it turns out they are in a total state and we are about to be landed with a huge tax bill.
He left an estate worth circa £650k. This consisted of a property worth £300k, two boats worth £100k in total and £250k in cash.
He left one official will from 1996 where he made my sister and I the sole beneficiaries but then wrote another will in 2007 which we found on his PC but this hasn't been countersigned or witnessed. In this will (and letter of wishes) he asked that the estate provide a property for his other half to live in for the rest of her life (or unless she re-marries). Together with a life insurance policy, £10k in cash from the estate and a flat she owns (which he paid off the mortgage and renovated for her) she was therefore provided for until she meets someone else (she is only 57 so likely to meet another person). At this point when he wrote the will all the cash and assets were in his name other than the house.
The property he lived in when he died was originally a holiday home and was put into a discretionary trust 20 years ago for my sister and I but following a stroke my father sold his PPR and moved into the holiday home with our permission. He then renovated the house in lieu of rent.
When he died we found out he had just put £90k in joint bank accounts with his girlfriend (a dependant, they had been together 15 years) and one of the boats worth around £80k is also in joint names. These are not tenants in common, but joint ownership. There is also a £100k life policy in her name that I believe sits outside the estate for tax purposes. We think the reason he set up all these assets in joint names was because the insurance policy was about to stop.
So thats the background - this is the situation I think we are now in...
IHT in relation to the property.
It is my understanding that as Dad moved into the property 6 years ago (it was never a PPR) and because he set up the trust after 1986 it is to be considered for IHT. I am also led to believe that as he moved into it following an unforeseen change in circumstance (a stroke) and also because he spent a great deal of cash renovating it we may be able to claim that it isn't liable for IHT?
CGT in relation to the property.
As this property was put into a discretionary trust 20 years ago it seems my sister and I are liable for the CGT (in addition to IHT potentially) - I presume only if we sell the place?
Right of residency for his partner.
I want to honour dads wishes and provide a roof over his other halves head but have a horrible feeling that because we are about to be landed with a huge tax bill we may need to sell the current property and buy a smaller one for her to live in. Can she claim a right to stay in the home she has lived in for the last 6 years? She hasn't paid towards anything during that period.
Joint assets.
I think these pass automatically to the surviving partner but as these were all privided using my fathers money (i.e. his cash bought the boat and it is his cash in the bank accounts) they will form part of the estate for income tax purposes.
Income Tax.
As Dad lived in the cottage for the last 6 years I have read somewhere there may be an income tax bill about to appear. I assume this is based on the market rent of the property and would be payable at £40% of the income the estate should have received from him?
At the moment I think the estate could be looking at a combined tax bill of around £200k!!! I'm desperate for any advice on whether this can be reduced at all.
Thanks in advance for your help.
John.
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Comments
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Hi John,
As one John to another, I might be able to offer some practical experience, but at the moment your posting reads like someone who is still shell shocked.
My dad dropped dead at 50 in similar circumstances but turned out to be debt ridden rather than wealthy - except for a status house, (mortgage covered by a life insurance policy) that exceeded the value of the nil rate band. At least you do have some cash in the system :eek:
You have two years in which to create a deed of variation and 6 months before interest on unpaid IHT starts so no need to panic.
You need to tease out the legal identities and values of the interlocking estate, trusts and individuals.
Let me start:
Am I right in thinking that there is an incorrect "re" in this statement and this female is not married or your step mother?
a property for his other half to live in for the rest of her life (or unless she re-marries).
Good luck - try to all work together with this tragedy - lawyers get expensive.
John
PS What became of your mother and when?
Ages of the people involved would be useful.
Current occupations and ability to generate excess income might be useful information.0 -
Hi John. Thanks very much for your response. You're correct - there is a lot of stream of consciousness going on at the moment so please excuse the way I impart info!
You are correct in that my fathers girlfriend was divorced from her previous partner and did not marry my father. She wasn't registered (if that's the correct phrase) as anything other than his girlfriend.
My mum divorced my dad 17 years ago and is now with another chap. She is mentioned in the official will of 1996 - getting £10k.
Dad was 68, his girlfriend 57, I'm 35 and my sister is 39. Mum is 64.
I work full time as a project engineer and am married to a recently made redundant wife, my sister works full time for a bank on a good wage and lives with a teacher.
Dad's girlfriend was totally dependant on him. She doesn't have a job but owns a flat which she lets out - gets about £330 a month I think.
Totally agree we need to sort this without including solicitors - that's the last thing we need.
Thanks again for your help.
John0 -
svpelican
Firstly sorry to hear about the loss of your dad. I see a poster is being mega helpful with your problem. Maybe the other poster could confirm if a solicitor from STEP would be beneficial is sorting this out for you. STEP solicitors are expensive but specialist in estate/trust issues. Not sure though if this is appropriate though once the person has passed away. Hopefully the other poster can advise. All the best anyway0 -
I'm out of my depth, here in Essex - where in the country are you? (Scotland?!?).
If I was the girlfriend's best friend, I would realise that she may well have cash in hand due to being able to take control of the joint accounts by simply producing the death certificate (7 -10 GBP) but she has the least authority and is probably the most insecure.
She may well be talking to a 300 GBP per hour solicitor as we write; though I obviously have no idea about her circumstances, family or finances. Presumably the small flat she now rents out is where she lived before meeting your dad? So is that two flats she owns? It might be an idea to check and see who is the registered owner of each property in this story at the Land Registry.
The cost is less than a fiver per property and it can be done on-line paying with a plastic card.
Who are the executors of the real original will?
I think you will definitely need professional help - now where is the cartoon of two people fighting over the ownership of a cow while the lawyer milks it?
John.
PS Sorry for this bit of gallows humour but have you seen the programme "Heir hunters" ?
It is a bit of docu TV being repeated at the moment on BBC1 @ 09:15 AM.
Perhaps you could finance the expensive administration of dad's estate by getting it turned into reality TV ?
I think what I'm trying to say is that If you go to a doctor you will be offered medecin, if you go to a lawyer you are offered a legal solution, if you go to an accountant you will get good tax advice but at the heart of this is a story of personal relationships and I don't know where you can find a professional with the knowledge, sensitivity and gravitas to arrive at a sensible solution and get everyone to agree.
Without seeing the real original will, I can only observe that the IHT payable is likely to need to be spread over all dads assets; ie you work out an effective rate let us say 20% averaged over everything and each beneficiary will have to pay in proportion to what they get after the specific bequests - unless the will says otherwise. So it is important that the girlfriend understands she cannot take the cash and slip away. You are all sort of joined at the hip for the next year or two.0 -
You're absolutely correct in everything you say John and thanks again for your advice. This has to and will be resolved amicably as a fight is the last thing we need. The really crucial thing here is the tax implications and once they are sorted we can sit down and agree on who gets what. I think getting professional advice with regard this area is the next step forward.
Thanks again all.0 -
This is a very complicated area- it is one you will need advice on given the IHT implications. From a contentious perspective, if you do end up sueing each other there is a useful organisation called ACTAPS- contentious probate is a specialist area, and I would recommend you speak to someone who has that qualification. If you could get someone who was both STEP and ACTAP qualified that would mean they could advise you on both the taxation elements and also about reaching an agreement with father's girlfriend. I am afraid don't do contentious work so can't really offer you any advice as to how you might deal with the potential dispute, and rather than trying to figure out the tax, I suggest you have an initial chat to someone: they won't charge that much for an initial meeting! (if you still have queries post tomorrow and I will give it some thought!) but probably as JP said, a Deed of variation will be the way to go, possibly granting a right to girlfriend to occupy the property for her life, and maybe a right to income from the capital.0
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Did your father's wife leave everything to him by the way- if so you will be able to claim the NRB which will give you £650,000.00 to play with. It is important to remember though that the estate vests in the Executors- are you named as an Executor in the 1996 will? So it is their responsibility to deal with any claim brought against the estate by gf, not you. There will be an automatic uplift to DoD values in respect of CGT. I am not sure without looking into it how the value of the trust property will be treated: I suspect that it will be charged at a flat rate of 18%, and I don't think your father's death will have any impact on it, but don't take that as read: it will of course be included in his estate for IHT purposes unless he paid a market rent to the trustees. Again, the IHT may be apportioned between the trust and the free estate or it may not- it depends if your father had a life interest in the trust or not. If he didn't, the tax will (I think) fall on the free estate- but you would have to check the terms of the trust instrument.0
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Before you start throwing money at lawyers and getting contentious, you need to get all the facts together so you can get the issue clear in your head. If you are prepared to furnish us with a few more facts/clarification there are experienced people on this forum that may be able to help you with this.
I am slightly unclear about what was in his estate when he died. The way I read it is you have included in your total of 650k the jointly owned boat worth 80k and the 90k in the joint bank account?
A life policy written into trust for the benefit of his girlfriend can be disregarded for IHT purposes.
You will also need to let us know whether your father made any gifts in the 7 years prior to his death - for example when did your father repay the girlfriend's mortgage and pay for the refurbishment on her flat? Also were there any debts?
For the issue of Capital Gains Tax you will need to know what the value of the holiday home was when it was placed into trust? Also, for completeness if you have it, the total cost of any improvements made since then. I don't think 'holdover relief' was available until 1992 so I assume your father would have paid Capital Gains Tax when the property was placed into trust - you might like to double check that point.
Who are the executors in the 1996 will and who are the trustees of the discretionary trust?
Once we are in a position to work out how much and where any inheritance tax liability arises then you can consider what to do with the girlfriend. Negotiation is key here. Although you want to honour your father's wishes and provide her with a roof over her head, you will need to take into account her own financial position.
Remember, your father has effectively given her an 80k boat and 90k in the bank account since drawing up that last, unsigned will in 2007. There's also the 100k life policy and the flat he partially or wholly paid for and renovated, so she isn't exactly destitute.
You will need to weigh it all up along with your own needs. Has there been any discussion with her about this? What are her expectations - is she prepared to go or is she digging her heels in? What is your relationship with her like? Has she instructed solicitors?Did your father's wife leave everything to him by the way...Again, the IHT may be apportioned between the trust and the free estate or it may not- it depends if your father had a life interest in the trust or not. If he didn't, the tax will (I think) fall on the free estate- but you would have to check the terms of the trust instrument.
The OP has already stated that he was divorced and it was a discretionary trust - presumably set up to minimise IHT. Discretionary trusts aren't able to grant life interests (as they would then become interest in possession trusts which are entirely different) and in any case the father would almost certainly not have been a potential beneficiary otherwise it would have defeated the whole point of the trust.
Generally when people continue to benefit from an asset after making a gift of it, it becomes known as a Gift with a Reservation of Benefit (GROB) and it is added back into their estate for IHT purposes - unless they paid a full market rent until their death. I will return to this subject in due course.
In the meantime don't worry too much - things may not be quite as bad as you fear.0 -
I am slightly unclear about what was in his estate when he died. The way I read it is you have included in your total of 650k the jointly owned boat worth 80k and the 90k in the joint bank account?
Gifts with reservation?
Gifts within the last 7 years?
Though not a direct comparison with the original poster's situation, there is an inspiring example of the MSE community rallying round to help with probate problems and an incompetent solicitor here:
http://forums.moneysavingexpert.com/showthread.html?t=11209930 -
but probably as JP said, a Deed of variation will be the way to go, possibly granting a right to girlfriend to occupy the property for her life, and maybe a right to income from the capital.I flatter myself that I am pretty competent having been doing it for seven or eight years.
Perhaps you should flatter yourself a little less as I'm not sure you are as competent as you think. A deed of variation can only vary the will or intestacy. The property that the girlfriend is occupying is not part of the estate as it was gifted to a discretionary trust 20 years ago and so cannot be varied.0
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