Inheritance Tax Article MoneySavingExpert.com Discussion

sasenach

boundarybob wrote:

I have set up a discretinary trust to take care of one IHT allowance but with property, the surviving spouse will still be over the threshold. I have been told that equity release may help as taking money out of your property means it is worth less for IHT purposes on death of surviving spouse.
Example: property worth say 350k after second death less allowance of 275 ( or whatever) = 75k @40% = 30k tax.
If I take out 100k as equity release the estate would be worth 100k less and I would have had the cash.
Am I missing something or is this correct?

Hi Boundary Bob,

Equity Release could be right for you, but you need to think carefully before you act. You could end up paying more in interest than you save in tax.

First off, taKing equity release won't reduce the value of your estate- the money comes back to you so this is tax neutral. You have to gift the money away to another generation (i.e. not your spouse) for there to be any tax saving. This is then a potentially exempt transfer and it could be 7 years before it is completely free of IHT.

The second thing to think about is the way the equity release plan is set up. Many of these plans roll up interest- you make no repayments of capital or interest. Would you take out a personal loan that didn't allow you to make repayments of capital or pay the interest on the loan?

For younger people, this can significantly eat into the value of the house. Many lenders cap the amount repayable at the value of the property, but if you only borrow 25% of the house value, this is hardly generous. Using equity release this way is only going to benefit your dependents if they can make money grow faster than the interest your paying.

If you're married, it's worth speaking to an IHT specialist. Most IFAs and Solicitors don't know enough about IHT planning to help you- check they know what they're doing. One option- if you're married- is to consider a Discretionary Will Trust. It may be possible to use this type of Trust within your Will to allow you to gift your house away and still retain residence for the surviving spouse. However, HMRC giveth and they taketh away- they could easily change the rules and leave you high and dry.

There's a lot here to read. but I hope it's helped.

silverfoxuk

This thread has been amazingly useful for me - thanks to all the posters, I have learned such a lot. The reason I've been reading is that I received a cheque this weekend (out of the blue) from my Great Aunt's solicitor saying the following:

"Dear (me)

Following a recent discussion with (your Great Aunt), my client has decided to review the terms of her Will which contained a legacy to you of an interest in an investment account presently in (your Great Aunt's) name. She has informed me that she would prefer that you should receive the benefit of this investment now and has closed the account. Accordingly, I am pleased to enclose my firm's cheque for £28,595.39 in your favour.

Yours......."

So going by what previous posters have said, I'm assuming my Great Aunt is giving me an 'unconditional gift'.

I am currently employed full-time and pay tax via PAYE, I have no other income so dont complete a tax return. I don't know exactly how old my Aunt is but my best guess is about 70, lives on her own, is currently compus mentus.

Am I right in thinking:

1. Re income tax, the £28,595.39 is an 'unconditional gift' and not classed as my 'income' therefore there is no income tax liability on it?
2. Re IHT, the £28,595.39 is a 'Potentially Exempt Transfer', depending on the total of my Great Aunt's estate at time of death (minus IHT allowance, PETs tapering deduction etc)?
3. Re IHT, if my great Aunt dies (say in 4 years) and owes more in IHT than her estate holds in assets at time of death, the IR could potentially come to me for the proportion of IHT due on her gift to me?

Thanks

sasenach

silverfoxuk wrote:

This thread has been amazingly useful for me - thanks to all the posters, I have learned such a lot. The reason I've been reading is that I received a cheque this weekend (out of the blue) from my Great Aunt's solicitor saying the following:

"Dear (me)

Following a recent discussion with (your Great Aunt), my client has decided to review the terms of her Will which contained a legacy to you of an interest in an investment account presently in (your Great Aunt's) name. She has informed me that she would prefer that you should receive the benefit of this investment now and has closed the account. Accordingly, I am pleased to enclose my firm's cheque for £28,595.39 in your favour.

Yours......."

So going by what previous posters have said, I'm assuming my Great Aunt is giving me an 'unconditional gift'.

I am currently employed full-time and pay tax via PAYE, I have no other income so dont complete a tax return. I don't know exactly how old my Aunt is but my best guess is about 70, lives on her own, is currently compus mentus.

Am I right in thinking:

1. Re income tax, the £28,595.39 is an 'unconditional gift' and not classed as my 'income' therefore there is no income tax liability on it?
2. Re IHT, the £28,595.39 is a 'Potentially Exempt Transfer', depending on the total of my Great Aunt's estate at time of death (minus IHT allowance, PETs tapering deduction etc)?
3. Re IHT, if my great Aunt dies (say in 4 years) and owes more in IHT than her estate holds in assets at time of death, the IR could potentially come to me for the proportion of IHT due on her gift to me?

Thanks

The situation is:

1) No income tax
2) This is a PET
3) Maybe- it depends.

For simplicity, I've assumed that there's been no gifts to a Discretionary Trust. It gets really complicated if this has happened.

Think of a bucket designed to hold cash equal to the nil rate band. When your Aunt dies, the bucket gets filled up with the assets in her estate. If her estate is too big to fit into the bucket, IHT is paid on the bits that overflow the edge. HMRC first look at any gifts that have ben made in the past 7 years- these are first into the bucket. This means that the value of the gift has not reduced for IHT purposes. They are applied against the nil rate band before the residue of the estate.

The CTO of HMRC look at gifts in chronological order when using the nil rate band. If the gift from your Aunt is the first or only gift she's made, it's likely that this will be free of IHT whenever she dies.

It's a common misconception that gifting in this way will reduce the value of the gift for IHT purposes. This is only the case for the element of any gift that is in excess of the nil rate band.

Hope this is halped- iof so please tick on the thanks button (I could do with a few!)

exil

1. Correct! No income tax liability at all.
2/3. As far as I know this will escape IHT as long as your aunt survives another
7 years - let's hope (not just for this reason of course) that she does!
If the worst happens, the estate would have to pay tax on anything
over what the threshold is at the time - so you would presumably have to
pay a share of that tax (don't know what the exact procedure is - probably the executors would be chasing you. The tax is paid by THE ESTATE ie the executors).

Say her estate is 500k and the threshold is 300k. Tax due 40% of 200k - 80k.
Since you ended up with about 6% of the estate you would have to pay about
5k.

Hmmph.My own chance of getting a cheque from an aged aunt is about on a par with me being struck by lightning.

patrea

Hi - does anyone know a good lawyer or other in London who can give advice on writing a Will that minimises the tax liability for my 2 children in relation to inheriting my house? Thanks

Dan_Brr

Lezl wrote:

Can anyone please let me know if it's a good idea to attend one of the seminars offered through the post (namely 'Inheritance Tax and You' seminar run by St James's Place partnership). My mum is concerned about this issue, as she has been widowed for the past 10 years and her estate totals in excess of £500,000.

Any advice is gratefully received.

My Dad has also been approached, and went to a seminar last week. It's something to do with putting the house in trust and involves the stock market. Not sure on the details (i'm visiting him this weekend), but when i googled 'st james inheritence' one of the first things to appear was a 'final notice' from the FSA for a £250k fine! This was an old pdf doc from back in 2003, but has made me a little concerned! Anyone know anymore?

MickKnipfler

Does anybody know what the IHT/Willable issues are with SIPPS and stand alone AIM listed shares?

margaretclare

Dan_Brr wrote:

My Dad has also been approached, and went to a seminar last week. It's something to do with putting the house in trust and involves the stock market. Not sure on the details (i'm visiting him this weekend), but when i googled 'st james inheritence' one of the first things to appear was a 'final notice' from the FSA for a £250k fine! This was an old pdf doc from back in 2003, but has made me a little concerned! Anyone know anymore?

Would this be what you're talking about?

http://www.sjpc.co.uk/sjpc-group.html

HTH

Margaret Clare

kizatt

my mum has recently inherited from my gran & now that the estate is settled & inheritance tax paid, she is looking at ways of giving some of the inheritance to my sister & i without us potentially owing inheritance tax on the amount in the future.

the original idea was to do a deed of variation for my sister & i and put the money into a trust so we could have access to it whenever we decided what on earth to do with it (procrastination is definitely a family trait!).

since the budget has targeted trust funds (so i believe), that is no longer an option. my sister & i are not keen just to have the money to invest because of the impact on our entitlement for tax credits etc (we really don't want to end up using the money to live on). my mum could keep the money and take out insurance against us paying inheritance tax on it if she gives it to us & dies within 7 years, or if it ends up remaining part of her estate. the other options would be to still do the deed of variation & use it to pay off some of our mortgages, put it into a pension, buy a rental property or invest it in the kids' names (i'm sure there would still be a threshold for this for tax credit purposes).

any advice or ideas would be much appreciated - the trust seemed like such a simple idea that covered all bases, but it's all getting very complicated again!

exil

I think the budget lowered the age limit for trusts from 25 to 18, so if you're over
25 already (don't mean to be ungentlemanly but you haven't told us your age!) I don't
think this has any impact.

If you don't want the money you inherit to earn interest you can use it to pay mortgages or bung it into a pension scheme (which Gordon Brown will top up), or buy a house, etc.

Assuming your mum has a good many years to live, she can give you a big gift now,
and then 3,000 each every year, which could add up to a large amount over 20 or 30 years!