Inheritance Tax on Tennants in Common

sloughflint

Reestit_Mutton wrote: »

In any case, you should really get a lawyer to deal with all the paperwork.

As a general rule, I would disagree with this.As long as OP gets up to speed understanding exactly what the Will is truly saying, and as long as it is simple, he and his wife hopefully should be able to deal with the estate themselves.

However, if the Will hasn't catered for keeping MIL safe ( from daughter predeceasing her, going bankrupt or divorcing) then maybe it would be an idea to organise a deed of variation ( with daughter's permission) to ensure that she is safe and also that the IHT position is as efficient as possible if that is applicable.

martinman3

Reestit_Mutton wrote: »

I've been through this situation myself so I feel I can shed a little light here (albeit with the caveat that I AM NOT A LAWYER).

As executors of the will it is entirely up to you to decide which assets to assign to your wife to use up her father's inheritance tax allowance. The use of the phrase "Up to the threshold for Inheritance Tax" is simply a convenient mechanism used in many wills to avoid the need to update the will every time inheritance tax thresholds increase.

If your FIL's will stipulated that a discretionary trust be set up then your MIL can "borrow back" any of these assets interest-free by providing a promisory note to the trust which simply means that she will pay back the loan out of the value of her estate when she dies before the remainder of her estate is divided up as per her will.

One word of warning though...according to the lawyer who advised me regarding my dad's will, borrowing half a house might be ruled illegal when your MIL's estate is being dealt with upon her death. As many surviving spouses who had previously done this hadn't yet died the whole area was still fraught with uncertainty when my dad died.

My lawyer's solution to this was for the trust to take my dad's half of the property and to sell it to my mum at a price considered to be fair value as of the date of my dad's death and then let my mum borrow back the cash that she had paid for the property from the trust. In reality this was all done by letter (no actual cash having to change hands).

As it happens, the rules changed just after my father died such that creating a trust and filling it to the max tax-free became unnecessary. The simplest solution would now be simply to pass everything on to your MIL as she can now use all of your FIL's unused inheritance tax allowance upon her death so there would no longer be any inheritance tax wastage if your FIL's allowance is not all used up right now.

In any case, you should really get a lawyer to deal with all the paperwork.

HtH
Reestit Mutton

Your suggestion may be best in some circumstances but not all. We don't known the current valuation of (half) the house or the value of the rest of the estate but ...

1. The IHT rule changes now allow the surviving spouse to inherit unused IHT allowance but the value of the house on final death may be higher than the two IHT allowances at the time and tax may be payable by then. Surely, advantage should be taken of low house prices now to pass half the house on to the daughter.

2. If the half passes to the surviving spouse and she later needs to enter a care home then the whole house will need to be sold to pay for it. If the half passes to the daughter only up to half the value of the house may be lost.

OP, please take professional advice. Obviously, seek out the solicitor who drafted the will.

martinman3

sloughflint wrote: »

However, if the Will hasn't catered for keeping MIL safe ( from daughter predeceasing her, going bankrupt or divorcing) then maybe it would be an idea to organise a deed of variation ( with daughter's permission) to ensure that she is safe and also that the IHT position is as efficient as possible if that is applicable.

Yes, I believe the correct action would be to leave half the house to the daughter and give the legal right for the MIL to stay there for as long as she wishes.

localhero

Hi Tuckerbox,

Some sound advice here from Sloughflint, and it would seem from your last post that this Will was a crude attempt to use up 2 nil rate band allowances to minimise inheritance tax. Whilst it may serve that purpose, there are potential pitfalls for his widow and his daughter as there doesn't seem to be a trust in place.

As far as valuing the estate is concerned, Sloughflint is spot on. Whether the property was owned as tenants in common or joint tenants the probate value will be half of the market value at death (less a small discount if you need to claim it, as it is a part share).

As far as what goes to his daughter will depend on what his assets are worth. If he had savings of his own worth £100k and his half of the house (as tenants in common) is worth £200k then her daughter is entitled to all of it. This means she's entitled to sell the house now to obtain her half share.

If she chooses not to then his widow has the further risk of the house being sold in the event of his daughter becoming bankrupt or divorced.

Assuming his daughter allows her mother to remain in the property until she dies, the potential problem for her is that if she already owns a property of her own then any increase in the value of her share of the house between her father and mother dying will be subject to capital gains tax.

Reestit_Mutton wrote:

The simplest solution would now be simply to pass everything on to your MIL as she can now use all of your FIL's unused inheritance tax allowance upon her death so there would no longer be any inheritance tax wastage if your FIL's allowance is not all used up right now.

I disagree. Whilst that would simplify the IHT position, the problem with that is that if MIL later requires care, then the house is at risk of being eaten up by care fees.

The solution proposed by sloughflint is the better one. The Deed of Variation should really be used to say what the Will should have done. And that is, half of the house to daughter, residue to spouse, but crucially a provision that the spouse can continue to occupy the property until she dies.

This will avoid all the potential pitfalls and will allow the surviving spouse to claim 2 full nil rate band allowances when she dies.

If you do go down this route this will need to be executed perfectly as you will only get one chance at getting it right, so I would strongly advise that the solicitor employed is a member of STEP.

localhero

martinman3 wrote:

OP, please take professional advice. Obviously, seek out the solicitor who drafted the will.

This is the last person I would advise going to - as these sorts of potential pitfalls should have been avoided in the first place.