Inheritance Tax Planning

kazzy

is there something called a deferred gift trust?

Mumstheword

shopndrop wrote:

My parents are thinking of chaning from joint tenants to tenants in common. Dad contacted a local solicitor who said it wasn't worth doing at their age (both 72) but didn't explain why. Is this something to do with them having to live another 7 years before being able to benefit?

Don't know. My parents changed to TIC probably a year to 2 years before mum died. No such advice was given to them.
As sneekymum said, I'd be interested to know the reason for this advice.
The only reason I can see is as Bob suggests, their joint estate would not be liable for IHT anyway. But how can anyone predict the value of the estate? That could alter substantially depending on the housing and financial markets.

sneekymum

I'm not into trusts - these cost lots to set up - the trustees have control - they don't work until seven years have passed - they need their own tax returns - they pay tax...

The simplest thing to do is for mother to give you some percentage of her house (and any siblings) and then survive seven years.

But - its not that simple - Mother cannot continue to benefit from something once it's been given away and it still count as having been given away - this is the Pre-Owned Assets Rule.

To avoid this Mother must pay a true market rent for her use of your part of the property. You would receive income from her - which is taxable - and it would also impact on any Tax Credits you receive (at 37p / £). Also there would be Capital Gains Tax on any increase in the property value (pro-rata) when you come to sell - which may be a long time away as Mother is quite young really...other factors which may or may not affect you - you could get divorced and Mother may find part of her house taken into account in a settlement - you may have assets seized through some wrongdoing - I have professional indemnity insurance for my work (which is nothing to do with finance) and should this fail to protect me in a claim my house / savings are at risk.

I have not suggested this route to my Mother - she wants to feel that at the end of the day the house is all hers...

Your mother could give you some money (+ your siblings?) and survive seven years (no pre-owned assets problem there)...This method works for me - I am given money by my mother and I choose to keep it safe in case I choose to give it back. Investing it in National Savings Certificates does not impact on Tax Credits. You say your mother needs income from the money? An Investment Bond in your name would allow you to withdraw 5% a year with not tax to pay and no impact on Tax Credits (except in 20 years time when any children I asume you have are long gone). There's nothing to stop you from choosing to give her this money...

As Mother's house is quite valuable a mix of the above two suggestions would knobble it nicely. I would recommend you spend a couple of hours reading this whole thread though...

kazzy

Thanks so much Sneeky.If i had an investment bond in my name and she had the 5% are you sure i would not pay tax?? Do you know a website where i can look at these investment bonds? At the moment she has her money in 'with profit bonds' and receives 5 %.Do you know if these are tax free or is the tax taken off at source??
Thank you for your time once again

sneekymum

Read this...
http://forums.moneysavingexpert.com/showthread.html?t=75655

Sound like your mother's already got an Investment Bond - especially since you mention 5% - this being the max you can take out of your original investment (not growth) - so no there would be no tax to pay - the tax is paid at the end of the term (20 years?). She might not be able to transfer it to you though - due to exit penalties - check the policy small print - ask for a cashing in statement (or whatever its called)...

The house splitting thing may be easier if there's some land that can be fenced off and is definately not in mother's use - also, be sure to pay council tax either directly or on a pro-rata bais with mother - get a receipt from her..

dunstonh

the tax is paid at the end of the term

Only if higher rate tax payer or borderline HRT. Otherwise, there is no tax to pay.

If i had an investment bond in my name and she had the 5% are you sure i would not pay tax??

There would be no income tax to be concerned with (as a non, lower or basic rate taxpayer). However, the investment would remain within the estate, even though its no longer in her name as she continues to receives benefit from that "gift". The 7 year rule wouldnt apply as that would start from the time she stops receiving any benefit from that "gift".

sneekymum

dunstonh wrote:

..the investment would remain within the estate, even though its no longer in her name as she continues to receives benefit from that "gift". The 7 year rule wouldnt apply as that would start from the time she stops receiving any benefit from that "gift".

Not really the same as my(our) circumsatances then, Dunstonh, as mother does not need any more income - and money flowing about is small in proportion to general expenses...

Investing on behalf of a parent and then giving it back (in parts) could surely be done in a small way though ? - the weekly shopping? - white goods? - what about paying for grandma's place on the family holiday? - we bought a seven seater car so mother can travel about with us - could she be using a pre-owned asset? I could see there would be a problem if it was her only/main/important income though.

Meanwhile, I'm struck by the thought of fencing off Mother's orchard...

dunstonh

Investing on behalf of a parent and then giving it back (in parts) could surely be done in a small way though ?

Officially, if the funds are the parents, then doing that would keep them within the estate. However, where there is no trail for those funds and 7 years have passed, I am sure it would be extremely hard to prove anything.

sneekymum

The opposite effect, of course, is where folk have genuinely been given cash by a parent - and then have generously (foolishly) spent it on the extension and moved mum in to care for her in her old age - only to find after seven plus years that IHT is still due as mum was benefiting from a pre-owned asset...

Its an odd system that prevents us from caring for our own families as is the norm in the rest of the world.

Mumstheword

sneekymum wrote:

I'm not into trusts - these cost lots to set up - the trustees have control - they don't work until seven years have passed - they need their own tax returns - they pay tax...

Hi SM, I've not read the rest of this thread yet, bu twanted to ask you about this.

Do you mean trusts whereby a sole remaining parent puts assets in trust whilst they are still alive? So the 7yr rule applies?

There is the discretionary trust whereby on the death of one parent, his/her assets up to the IHT allowance level are left to a trust. So no IHT there, because you are under the allowance, and the rest to the surviving parent - again no IHT because there isnt any btwn spouses. Then the remaining parent's estate will still be entitled to it's own IHT allowance. So, you have used both allownces rather than all assets passing to the surviving spouse, then only having the one allowance to use on their passing. To put half the property in trust, it would have needed to have been owned as tenants in common, rather than joint ownership. If it was joint ownership, the remaining owner would automatically own it all, but as TIC each can leave their half to whoever they choose. There is a problem there though that they could leave it to the cats home, lol!