Wills and Inheritance tax

Confused2010

Hi,

Looking for some info on wills and IHT

Basically my mum and dad have 3 properties. 2 houses on rent, 1 commercial property (which brings additional income), and a fair amount of cash savings.

My dad is the person we all ASSUMED had everything sorted out, but as his health went downhill we brought up the mention of the will...to our shock he still has not sorted it. He's currently 60. We all hope he makes it for 7 more years, and he should. But should the worst happen we don't want to be hit with huge IHT. Especially as we're looking to buy a new home soon, and we are going to re-mortgage one of the houses to get a loan.

both current properties are worth around 300-400k each , the commercial one is worth 200k and they have cash on top.

Now if we make a will tomorrow saying me and my bro get everything, and then the worst should happen. Would we still have to pay the IHT ???

I've heard in a will IHT does not apply? Please confirm?

Are there any ways to avoid the IHT? Say if the properties had me and my bros name added to them?

Aegis

Confused2010 wrote: »

Hi,

Looking for some info on wills and IHT

Basically my mum and dad have 3 properties. 2 houses on rent, 1 commercial property (which brings additional income), and a fair amount of cash savings.

My dad is the person we all ASSUMED had everything sorted out, but as his health went downhill we brought up the mention of the will...to our shock he still has not sorted it. He's currently 60. We all hope he makes it for 7 more years, and he should. But should the worst happen we don't want to be hit with huge IHT. Especially as we're looking to buy a new home soon, and we are going to re-mortgage one of the houses to get a loan.

both current properties are worth around 300-400k each , the commercial one is worth 200k and they have cash on top.

Now if we make a will tomorrow saying me and my bro get everything, and then the worst should happen. Would we still have to pay the IHT ???

I've heard in a will IHT does not apply? Please confirm?

Are there any ways to avoid the IHT? Say if the properties had me and my bros name added to them?

You heard wrong, I'm afraid. Wills do not stop IHT being payable. They can arrange for inheritance to be passed in a more tax-efficient manner and with much more flexibility than dying intestate, but if you're relying on a will to avoid this particular tax, you're not on to a winner.

The only two reliable ways I can think of to mitigate IHT for UK residents are gifting and insurance:

Gifting means that he has to lose all benefit from the asset in question, i.e. no signing the house over to kids but continuing to live there rent free or to keep the rental income from the investments. The gifts have to be without reservation, and careful documents need to be kept to prove the date of transfer and the circumstances for larger assets.

Insurance doesn't actually mitigate the IHT burden but instead provides sufficient lump sum to cover the tax amount. Typically this is taken out as a decreasing term assurance (or gift inter vivos) policy to ensure that the IHT on a gift is covered if the life assured dies within 7 years, or as a whole of life policy to pay out whenever they die, for an amount sufficient to cover the whole estate. The latter option would be very expensive to start for a 60 year old, so a strategy of gifting with associated term assurance would probably be the cheapest and safest bet.

Gifting on its own will probably be fine too, but it depends on how safe you want to play it.

If in doubt, speak to an IFA with some inheritance tax planning experience, as they will have experience with trusts and investment bonds which might be able to help mitigate in other interesting ways that I'm not particularly familiar with.

There are a couple of property specific rules to do with joint tenancy or tenants in common, effectively splitting the properties into two and allowing each half to be inherited separately. If one parent dies significantly before the other, this could reduce the IHT on the properties by half


At the end of the day, though, it's up to your parents what they do. It's their stuff, and they're not obligated to minimise IHT or to ensure that their assets are passed on to you now because you want to get as much as possible sooner rather than later. If they're looking to enjoy their assets for the rest of their lives, gifting may not be a strategy they want to consider, and likewise they may not be keen on taking out and paying for life cover that they'll never see the benefit of. Keep all this in mind when discussing the matter with them, as these issues can cause family rifts if you push too hard.

Hermann

Your username seems very apt ..... confused you are ..

I suspect you really need to speak to real life independent advisor.

However in the meantime ... NO in will IHT DOES apply.

The value of the estate at time of death is what counts, thats what counts for IHT.

You mention 7 years ...... I think you may be referring to the situation regarding gifts. If your parents gift the property to you , and they have no further interest in it, then after seven years it won't be counted when calculating the value of the estate.

There are various forms of trust which may be relevant but I'll leave others to comment on those.

With an estate of £1 million plus independent advice would probably be worthwhile.

D1zzy

It is also worth bearing in mind that there is no IHT to pay on assets left to a husband or wife, and that double the nil rate band is applicable when the 2nd partner dies.
The nil rate band is £325000- so if your dad left everything to your mum, when your mum dies she can leave £650,000 before any IHT is due.

As Hermann says gifts can be fully excluded from the estate IHT calculations after 7 years - but there is a sliding scale,so that for each year the "donor" survives, less of the gift needs to be included in the calculation

G_M

The advice above is good, but I worry about your wording. You say your dad's health is poor - what about his mental state?

"if we make a will tomorrow saying me and my bro get everything, ..." It is not you making this will, it is your dad (and mum if joint/mirror wills). And it's up to them who 'gets everything'.

"we're looking to buy a new home soon, and we are going to re-mortgage one of the houses to get a loan." Again, if your parents wish to help you buy/finance a new home, fine. But that is matter they should decide, without pressure.

CLAPTON

where do they live ? do they no have a property to live in?

Confused2010

Thanks guys...deffo need to speak to someone and get this sorted asap.

btw: It#s not e and my bro's decision to do this so we dont get hit with a huge tax payment. They're the ones that want to avoid it for us. Last thing we want to have to sell what they've given us to pay the tax...esp as the rent from the properties are what we're using to pay the mortgage

How about if we added me and my bros name onto the deeds of the properties?

G_M

You really need some professional advice..

Confused2010

G_M wrote: »

The advice above is good, but I worry about your wording. You say your dad's health is poor - what about his mental state?

"if we make a will tomorrow saying me and my bro get everything, ..." It is not you making this will, it is your dad (and mum if joint/mirror wills). And it's up to them who 'gets everything'.

"we're looking to buy a new home soon, and we are going to re-mortgage one of the houses to get a loan." Again, if your parents wish to help you buy/finance a new home, fine. But that is matter they should decide, without pressure.

they're not helping me buy a house.....WE are buying a family house house. Their business is making huge losses at the mo. And rather than retire to a nice house and spend money coming in from the rents from the other places. They can't as the business is worth nothing. So after all that hard work, and his leath the way it is. I can't let them not have their chance to live in a nice home. So i'm financing most, and they're financing a portion by re-mortgaging part of one the houses

Confused2010

CLAPTON wrote: »

where do they live ? do they no have a property to live in?

They do. It's rented. Income from business used to cover the cost. It no longer does.

CLAPTON

tells us the assets of your parents

-value of properties and who owns then (him, her, jointly ) ..include the property they live in
-othere assets, savings etc and again how are they owned?


probably the best thing is for him to make a will that leaves everything to his wife

If you and your brother 'add' your names to the deeds of the houses then there will be an immediate Capital gains tax liability AND you are likely to be liable for IHT if he dies wihtin 7 years (a very bad deal)