Inheritance tax question

POSSETTE

My friend has parents who are leaving thier 750k estate to the 2 grandchildren because they beleive it will avoid the inheritance tax as it isnt going directly to there 2 children ie my friend and sister.is this correct? i dont think so..

fubar4164

In a word - no.

IHT is rather complex, but each person gets a threshold when the die (currently £325k) and anything over this is taxed at 40% on death (there are exceptions but I don't think they're relevant here.) If items are left to a spouse, there is no IHT charge. If everything is left to a spouse, the surviving spouse can then benefit from 2 allowances (i.e. £650k) when they die.

But leaving it all to the grandkids will mean IHT is due. If they gift it while they're alive then there's no IHT as long as they survive 7yrs afterwards (and don't continue to live in the house, or else pay market rate rent for it.)

I hope this is of some help. I would recommend getting professional advice on the matter if they're planning for IHT.

John_Pierpoint

Perhaps the grand parents know something about "probity" of their children?
Perhaps the children are already rich in their own right?
Perhaps the grandchildren are about to run into serious expenses like University..............?
Perhaps the grandchildren are very young and so have no income of their own and will be able to reclaim the Income Tax tax paid on the yield of their inheritance.............?.
How old are the grandchildren?
Can I sense a Trust in these arrangements somewhere?
The secret to IHT avoidance is to be spending money the day before you die but to be poor (well worth less than 325K) when you die - for example you could raise money on the house, buy an annuity with part of it, give a fair bit of it away and then die not owning the house you live in.

In other words "giving" the wealth to the grandchildren skips a generation of IHT and could save their parents part of the small fortune that having kids costs these days ?

POSSETTE

The children are 13 and 9 and are ok financially as my friend and wife are well off themselves.i just thought he was wrong when he said the children get it to avoid IN tax.
i will inform them of these comments ..thank you

John_Pierpoint

POSSETTE wrote: »

The children are 13 and 9 and are ok financially as my friend and wife are well off themselves.i just thought he was wrong when he said the children get it to avoid IN tax.
i will inform them of these comments ..thank you

"The grandchildren are 13 & 9" ?
If they are then that is a trust that has been created.
...........................................................................................................................
"..........he said the grandchildren get it to avoid (a second charge too IHT) IN tax." in xx years time?.

How old are the grandchildrens' parents?

James_Trimby

Hi it is a common tax avoidance where next generation dont need the monies for themselves skipping the generation therefore means that when the skipped generation dies they will have less IHT problems. BUT they are not that far over the IHT nil band and sounds like your friends are not that old so does seem a little OTT and of course, as with most IHT planning, it is all without hindsight (tax rules can and do change/how do kids grow up/will your friends die tomorrow or in 40 years?/ in 30 years will they need the money!!!)

If they can afford it,and easy to do (ie not all in house value) they should use the annual allowances (£3000 each pa and 1 year carry forward if missed p/y)plus as many £250 gifts to others as they like. PLUS can gift surplus income (stopping estate growing by surplus interest/pensions etc). It all helps and none of these need the 7 year survival.

If they want more then the comments about logic in giving to kids needs considering (they will get control at 18 unless a proper trust is drawn up and even then the tax gets a bit messy after that) ALso a proper trust can deal with other grandchildren if they come along?!

As can be seen it is v complicated and is as much about understanding the family as it is the tax position. A small amount in a bare trust (eg account in kids name controled by parents) might help with hols school trips a car? before they are 18 and can do what they like! At end of day if they are still desperate to avoid IHT as can be seen from above if they can get combined estate to about £650,000 they are covered. leave rest to their children after 2nd death and then (if rules still allow) they can alter the will to leave to their kids IF it is appropriate at the time. As this is a potential £40,000 tax problem maybe worth suggesting the family sits down with a qualified accountant/solicitor etc with the right experience to discuss.