Inheritance Tax Planning

John_Pierpoint

getmore4less wrote: »

The 7 years is for both of you to die which may be a low risk if both in Ok health.
Gifting does not make more tax due

I don't think I agree with that:
Mr Wealthy cannot give away £106,000 a week before his death and then leave the widow wealthy the £325,000 half of the family home, she does not already own. Allowing widow wealthy to say "We will settle up when I pop my clogs and I still have a full 200% of a nil rate band (ie currently £650K) allowance".
Admittedly the tax bill has been deferred until the second death.

Wiganwishes

[QUOTE= You can both also gift free of IHT from surplus income, if you satisfy criteria that someone will doubtless come along to explain shortly. These may be useful instead of, or in addition to, gifting a lump sum at the beginning.

If you want to do it by lump sum, see whether the School will give you a discount if you pay the lump sum direct to it.[/QUOTE]

Thanks Kidsmugsy and getmore4less. We already have the "regular payments out of income" covered and were looking at paying a lump sum to cover several years' fees rather than put the money into a trust to cover the education expenses. (BTW the school would make a small discount if paying by lump sum.) The lump sum would come out of capital. But my worry was that the taxman might look at it as if we had done the equivalent of gifting the money to our daughter/son-in-law and they had paid the invoice, rather than we were just paying an invoice. Perhaps I am just getting too cynical!

(Sorry - I seem to have messed up that inserting a quote bit at the beginning!)

getmore4less

John_Pierpoint wrote: »

I don't think I agree with that:
Mr Wealthy cannot give away £106,000 a week before his death and then leave the widow wealthy the £325,000 half of the family home, she does not already own. Allowing widow wealthy to say "We will settle up when I pop my clogs and I still have a full 200% of a nil rate band (ie currently £650K) allowance".
Admittedly the tax bill has been deferred until the second death.

You need to be a bit creative so the gift comes from Mrs Weathy
(oe the other way round if Mrs weathy pops off first)

emma3000

Hello,

My mother is 76 and she wishes to start planning for IHT. She is willing to give to my brother and I, then hope to live for 7 years so there is no IHT due. (Though she may not survive those 7 years.) There are no other significant potential beneficiaries.

She is worth about £4 million and her health is quite poor. She needs money to live on, for care, and later for a care home, so I don’t think it makes sense for her to give the full amount now. She could give £4 million - £0.5 million = £3.5 million now, but she may well need more than £0.5 million to live on for her remaining years. Of course, if she did need more my brother and I would help. But, then I guess we would be paying unnecessary IHT if she dies within 7 years. Her gift to us would be used for her – so ideally it would never have been an IHT-liable gift in the first place.

So my questions are:
What is a sensible amount for our mother to gift to us now? and/or
What is the best way of dealing with this situation?

Thanks,
Emma

John_Pierpoint

Hi Emma,

Welcome to MSE and the very varied selection of people contributing to this forum.

Just a few thought starters - someone more experienced will be along soon:
[Of course you are going to take proper legal & financial advice, are you not? ]

Presumably giving 100% to a charity is little more appealing than giving 40% to the government?

Was she married, when her husband died?
If yes
What happened to dad's estate ?
[A marriage of convenience is not totally unknown, as there is no IHT between spouses and those in a legal union, and CGT can be carried over - see below]

How has the family acquired its wealth and is mother part of the business; preferably something that includes farming & forestry [though being an agricultural landlord can help].

To get a feel for the odds involved, you could try to get term life assurance for 7 years. I would guess that the life expectancy of a female, who has avoided death so far at that age would be about 12 - 15 years statistically.

What is the nature of the ill health? (**)

Who owns the accommodation where mother lives? [Does Reservation of Benefit ring any bells with you?]

I am a little surprised that a family with at least 4 million has:

A. Not got other related wealth? (Trust arrangements that you have not mentioned?).

B. Entrusted a seven figure sum to an elderly health impaired female - before the gender equality mob flame this posting - please confirm she must be some lady.

There are some small allowances against the 7 year rule - gifts of £3k a year, with some extra gifts such a s wedding gifts allowed too; plus gifts out of income, as against capital. Even with allowances doubled for the first year of giving, that won't make much a a dent in 7 figure wealth

IHT is currently 40% on all net worth over £325k (or 650k depending on marital arrangements) Capital Gains Tax - CGT - is 28% on the gain during ownership of everything over £10.6k disposed of during each year, with the exception of cash. There are a few other exceptions like motor cars.
Do you realise that there is a "double whammy" risk of paying CGT now and IHT on the same thing in 6 years time?

John

(**) Presumably mother's ill health has nothing to do with active military service?

mark55man

Emma - Just a thought

from the article

"
Get tax advice.

While I normally tell people to try and do things themselves as it's much cheaper, if you have sizeable assets Inheritance Tax is one of the few occasions I think paying for good professional legal or tax advice is well worth the money – a few hundred quid to save £100,000s.

...

However, for those with bigger estates an Independent Financial Advisor may, depending on their qualification, be able to help (see the Financial Advice article), but a solicitor or tax accountant is a better bet for more specialised info. Preferably find one who is a member of the Society of Trust and Estate Practitioners; take a look on the STEP and Chartered Institute Of Taxation websites. "

emma3000

Thanks, mark88man, I agree with you, though it will be really helpful to get some ideas before we approach such advisors, so we can discuss it as a family before paying lots per hour

emma3000

Hi John,

Thank you for your helpful thoughts and further questions.

Our mother would like most of the money to go to my brother and I, so you’re right that the charity exemption will not help a lot.

She was married when her husband / our father died. Our father gave to my brother and I his nil-rate band via a trust and the rest went to mum. Our father made his money through industry and his own businesses, but his stakes were sold off following his death.

Our mother has a rare health condition, which makes it hard to gauge her life expectancy. Let’s say 2 to 10 years most likely.

She lives in a house that she owns with a full-time carer and I also live there. My brother lives in his own house.

Our mother has her house (about £1.5 million) plus an investment portfolio (about £2.5 million). Yes, it should be sorted out better. CGT is not much of a problem as our mother has such large capital losses retained on her tax form to offset gains against. As you say, the annual allowances are insignificant compared to the total amount.

I wonder how our mum can best pass on her wealth to us to minimise likely tax?

Thank you.
Emma

John_Pierpoint

So you have already used up father's nil rate band, leaving just mum's currently £325k.

There are techniques for softening the blow such as discounted gift trusts and more dubious tricks - but "your" wealth is out of my league.
The government, quite rightly, would like you to be playing the game and in business with your mother; that would create jobs for accountants and civil servants even if nobody else.

Build a house for yourself in mum's garden?
(Needs careful planning and timing of selling the plot and getting planning permission.
Size limits on garden dimensions)

I had this situation the other way round as sort of trustee of a sort of interest in possession trust, where beneficiary, supposedly dying in early retirement, went on to damned nearly get a telegram from the queen.
Bit of a long story but guess who had to manage the whole situation on as shoe string, including unblocking the toilet and doing the tax returns.

emma3000

I am really amused by your idea of building a house in the garden. No way we can get planning permission here but I am still curious to know what your thinking was?!

Thanks for the 'discounted gift trust' tip-off - I am reading up on that. You mention 'dubious tricks' - can you name any particular schemes or strategies that we should say 'no thanks' to when we approach an advisor? (Either because they carry too much risk of not being accepted by HMRC or because they are designed to enrich the advisor with a hefty commission.)

When you mention 'to be playing the game and in business with your mother' – is that to say that a good strategy is to set up a company that the 3 of us own that our mother puts money into?

Thanks. Sounds like you endured quite a saga as a trustee - some people just keep going!