Some questions on Inheritance tax allowance

lightSwitch_3

A couple of questions
My father died in 1995 and left everything to my mother. I don't know if any legal paperwork had been done to formalise her becoming beneficiary of his half of the estate before or after his death, they had been married for 40.

1. Does the land registry assume automatically that these are now her properties or would she have to formalise it somehow?

My mother now has a house which is her main residence (£600000) and a commercial property(£400000). There is a mortgage of £200000 on her main residence.

She wants to give one property to one child and one to the other child.

2. Will our IHT liability be 40% on £200K if she passes the estate to us and not survive 7 years? ie.

£600K + £400K - £200K(mortgage) = £200K

00ec25

you need professionl advice!

1. was the house owned as joint tenants or tenants in common? It may already be in her name depending on your answer or she may have to transfer it. I don't know about commercial holdings,

2. you are mixing up your taxes! The status of main house is irrelevant for IHT (you are thinking of CGT)

so the total estate is worth £1m, your mother has a tax free allowance of £650K based on your statement that your father left everything to your mother and therefore she gets 100% of his (unused) IHT allowance which is currently £325k per person at 09/10 rates

furthermore the commercial property may get additional business rate relief

so its not 40% on 200K, it could be 40% on £1m - 200 mortgage - 650 = 150K or it might be less

Get professional advice

lightSwitch_3

00ec25,

thanks and sorry about the calculation. I got it wrong.

it is as you wrote
£1M(estate)- £200K mortgage = £800K - £650K (allowance) = £150K

I will get professional advice Thanks

SeniorSam

lightSwitch wrote: »

A couple of questions
My father died in 1995 and left everything to my mother. I don't know if any legal paperwork had been done to formalise her becoming beneficiary of his half of the estate before or after his death, they had been married for 40.

1. Does the land registry assume automatically that these are now her properties or would she have to formalise it somehow?

My mother now has a house which is her main residence (£600000) and a commercial property(£400000). There is a mortgage of £200000 on her main residence.

She wants to give one property to one child and one to the other child.

2. Will our IHT liability be 40% on £200K if she passes the estate to us and not survive 7 years? ie.

£600K + £400K - £200K(mortgage) = £200K

............... Hi,,

Be careful of this, as your mothers gift of her home would not be exempt at all after 7 years unless she paid a full market rent to the new owner, which in turn would be taxed as income.

Furthermore, any gift in excess of the nil rate band allowance, currently £325,000, would be immediately subject to inheritance tax of 20% upon thje balance in making that gift.

If your mother divests herself of all assets and needs to go into Care before she dies, the liability for Care costs could be levied on the beneficiaries of the gifts.

However, there may be other options that a 'specialist' Independent Financial Adviser may be able to make you aware of, so seek out someone who is familiar with this particular area of planning and you may benefit.

Finally, you can enquire of the Land Registry regarding the present registered ownership of property, but if Probate was dealt with by a compitent solicitor, the new registrations in your mother's name should have been carried out.

Hope this helps.

Sam

localhero

Lightswitch,

For IHT purposes both properties will be included in the value of your mother's estate and so it makes sense to explore how to set things up in a tax efficient way.

The commercial property will only qualify for business property relief if it is a trading business (ie a cafe) rather than an investment business.

Deliberate deprivation of assets will only be an issue if the authorities can prove that the transaction was to avoid paying for long term care - which quite clearly it isn't. It is legitimate tax planning.

SeniorSam wrote:

Furthermore, any gift in excess of the nil rate band allowance, currently £325,000, would be immediately subject to inheritance tax of 20% upon thje balance in making that gift.

This is not quite correct. The immediate 20% tax charge will only apply if this is a gift into a trust. Otherwise if it is an outright gift (known as a PET) then there will be no immediate liability.

As SeniorSam correctly states - a gift must be with no strings. If you benefit in any way (ie occupy the property or continue to collect the rent) then the gift will be pointless as it will be added back into her estate for IHT purposes. Further problems would arise which I won't go into.

Gifting the home is probably out of the question, so it may be worth gifting the commercial property. If she survives for 7 years then it would mean the IHT problem is eliminated.

However it would be a `disposal` and would be subject to CGT at 18% less any reliefs and her annual exemption.

There are many issues that arise and care must be taken. I would recommend that your mother consults a member of STEP who will have the necessary expertise and qualifications to find a practical solution for your mother.

lightSwitch_3

Thanks guys for your responses. I can now see that it is actually more complex than I thought. It definitely requires an expert on the matter and a competent one at that.

I thought it was as simple as, we inherit all the estate, if she survives for 7 years IHT problem solved, if not then we pay 40% on £150K as calculated above. It seems it is not that simple.