Inheritance Tax

nqsenile

As the clock ticks on one considers with increasing urgency how to pass on to the children the maximum portion of one's estate and the minimum, within the law, to Mr Brown.

There has been some discussion of this topic but related to specific case, eg paying for support. I would like to open a more general thread.

Topics that might be aired could include:-
Lobbying for a considerable increase in the threshold before Inheritance Tax bites - £500K, exclude value of main residence ?
How to pass money down efficiently
Investments in trust - but what about one's need for income
PETS
£3k annual allowance
Larger gifts that have no effect on one's standard of living - how does one prove that they have no effect
Insurance policies written in trust to meet in part or in full anticpated tax bill, Whole of Life or Term

There must be lots of ideas out here - let's here 'em

My prefered one is SKIing :-)

Reestit_Mutton

nqsenile wrote:

Topics that might be aired could include:-
Investments in trust - but what about one's need for income

WEALTH WARNING: I am not qualified to give financial advice. You are advised to take proper financial & legal advice before acting upon any of the information conatined in this post.

I thought that was what loan trusts are for?

You loan X amount to the trust (interest free) and the trust pays you back over 20 years i.e. at 5% per year.

The trust is, in effect, paying you out of its income but Gordon Brown is happy to treat the rapyment as a capital repayment.

After 20 years, what's left in the trust is (currently) outside of the inheritance loop. If you die within 20 years, the portion of the loan that is yet to be repaid is still treated as part of your estate but everything else (trust growth/income included) is exempt.

Of course...Gordon Brown can easily change the rules at the drop of a hat and he has in the past also made changes retrospective so be very careful not to enter into anything that will be difficult or expensive to unwind in the event that the tax net is eventually cast in your direction.

For instance, certain gifts to discretionary trusts are only now being tested in the courts - those who opted to gift their half of a house to a trust for the kids upon their death may postumously find that Gordon Brown rules this gift illegal (many years later) due to the surviving partner continuing to enjoy a disproportionate benefit from that gift by virtue of being the only person to live in the property. If that's the case, the gift will prove to be a complete waste of their IHT allowance. Instead, the *current* wisdom is that the executor should trade the deceased's half of the house for a beneficial charge for half the market value of the house prior to declaring what is to go into the trust. The charge will then be repaid to the trust from the survivng partner's estate upon his/her death. This doesn't shield the surviving partner's estate from the effects of rising house prices but it does at least get the first partner's IHT allowance used up. The only uncertain issue at present is whether or not stamp duty will be levied on the trade - to the best of my knowledge, the courts are still deciding upon this issue.

One thing that I find quite interesting generally wrt IHT efficient trusts is that, despite the lack of information on this subject, if you push the financial providers hard enough they will eventually admit that you don't actually have to buy one of the financial products that they are trying to sell you in order to set a trust up. Cash will be just as acceptable. It's just that it's not in their interest to tell you this. However, you may need to go to a solicitor to set a cash trust up as the financial institutions simply can't be bothered to do it for you.

The reason I mention the above is that I'm looking into this as we speak and the plan is for my mum to provide a mortgage for one of my brothers via a loan trust with my brother's mortgage repayments providing the trust income to pay for my mother's annual 5% repayment from the trust.

Of course...if needs be, my mother can call back the entire pot at any time by getting the agreement of the beneficiaries to pay it back - if anyone objects, she has the ultimate sanction of removing that person from the beneficiaries list. So, it boils down to only having to trust one of the beneficiaries (in this case, me) and striking out everyone except the one person that you trust to agree to the repayment.

Once again...I must repeat that, while I am generally clued up, I am in no way an expert in these matters and I am in no way officially qualified to give financial advice. If there's anything above that you believe to be untrue, please do speak up as we wouldn't want to give the readers of this forum the wrong impression...especially where such things as inhertiance tax are concerned.

HtH
RM

Robert5988

Interesting post RM.
I have looked at methods of avoiding(as opposed to evading!!) CGT.

The problem, as you rightly say, is that any of these schemes can rendered useless by a stroke of the Chancellor’s pen – and retrospectively to boot.

What I do find confusing is the whole tax position on gifts. There are Tax rules on the amount you can give annually, on marriage etc. However there are rules that appear to allow gifts in excess of this(from income?) as long as your standard of living is not affected.

So take a position where I have, say, an income of £30k and outgoings of £20k.
If I chose to give £10k to a child, I understand that is allowable?

If so, can I take out an interest only remortgage on my house to invest the capital to raise my income?

How the above ties in with PETs I really don’t know.

yorkshire_ria

http://www.barclays.co.uk/estateplanning/01_inheritance.htm

Pal

I thought the rule was broadly that you can give away as much as you like as long as you live for seven years afterwards (a potentially exempt transfer). If you die with seven years IHT is payable.

Gifts up to the limits mentioned are never subject to IHT.

Debt_Free_Chick

I thought there was a limit to gifts from income of £3,000 a year? Could someone clarify, please?

margaretclare

nqsenile wrote:

As the clock ticks on one considers with increasing urgency how to pass on to the children the maximum portion of one's estate and the minimum, within the law, to Mr Brown.

There must be lots of ideas out here - let's hear 'em

My preferred one is SKIing :-)

I totally, totally disagree with your first sentence, and see my comment in the thread below about Grandparent who may have too much savings for state help (or words to that effect).

The usual wording is 'Grandparents/parents have worked hard all their lives, paid taxes, fought in a war etc etc, now they face having to sell their home to move into a nursing home, they wanted to leave it all to their descendants...etc etc'

I have not the smallest sympathy. IMHO what a person has 'scrimped and saved and worked for' should be used for their comfort and convenience.

No one has an automatic right to an 'inheritance'.

BTW I am still saving in a stakeholder and an ISA - this is because I reckon that in a few years' time we may be glad of a little extra, and I would rather do something about it myself rather than - as so many of my age-group do - sit back and whinge about not getting what they think they were entitled to. A guy who was at school with me is still whingeing about not getting a medal for his part in that ill-starred Suez conflict.

Also I am lucky in that I have enough spare income (although retired) to enable me to go on saving. But it will be there for whatever WE need or want, not to be kept for others.

Grrrrrr!!!

Margaret

KD

Paul_Varjak wrote:

DEBT-FREE-CHICK:

The £3,000/year limit does not have to come from income, it can come from capital.

The 'Normal Expenditure out of Income' concession is in addition to the £3,000/year limit and all the other concessions (e.g. gifts to charities, maintenance of the family, political parties, charities, on marriage etc) to avoid IHT, but one that is not generally known about. For instance, gifts made under a deed of covenant or premiums to pay for an insurance policy or contributions to a pension scheme for the benefit of someone else can qualify.

If the gifts are not part of any formal agreement but you intend that they will be regular gifts they can still qualify (especially if your intention is clear by setting up a standing order for instance). The first few payments may not qualify until a regular pattern of gifts has been established.

The value of the concession is unlimited but the expenditure must be made out of income and must not reduce the givers standard of living. Examples of where it would not qualify for the concession is if 'income' from an annuity or an Investment Bonds is used, as these technically repay capital rather than income.

Also, the gifts generally have to be cash. If they are not cash you have to show that they are purchased out of income and you will have to show a regular pattern of such gifts.

All the above is from personal experience only. I am NOT an expert in such matters!

Would the person receiving this money have to pay INCOME tax on it? (Does the Inland Revenue treat it as a source of income for them?)

KD

nqsenile wrote:

As the clock ticks on one considers with increasing urgency how to pass on to the children the maximum portion of one's estate and the minimum, within the law, to Mr Brown.]


nqsenile ( just got that btw... tee hee)

Tax Planning is very important. I am not a silver saver myself - however I do look after my elderly mothers affairs and i have been wandering around the boards scrapping up intelligence on IHT etc in order to best utilise the assests that my parents worked very hard and long for.

It would be great if Martin could do an article on the this a bit like his SAVINGS FOUNTAIN one, to help people through what seems to be a myriad of piece by piece tax laws. I apprecaite that there is lots of individual case stuff but having trampled through the boards, the IHT stuff is all over the place and it would be good to bring it together.

As for the point about inheritance, my parents came from nothing (violins please) and I'm going to ensure we take steps now to help the 'family' evolve. This is what my mum wants and she gets enjoyment from seeing her family benefit from any help she can give, however, I'm clear there are rules that need to be followed. A few months ago I was completly ignorant about this sort of area and I'm trying to get 'jenned up' on it and will seek professional advice as needed. I want to play by the rules...just need to learn a bit more about them - this is a great place to do it.

In truth, the best inheritance my parents gave me was the opportunity given by them stretching themselves to become homeowners in the early 60's and ensuring that we had a good education (state schools then University). In future it looks like my kids will have to pay for their education and granny is keen to help them on their way.

It's certainly worth looking into and it needn't be a case of depriving yourself in any way.

shibumi

Reestit_Mutton wrote:

WEALTH WARNING: I am not qualified to give financial advice. You are advised to take proper financial & legal advice before acting upon any of the information conatined in this post.

I thought that was what loan trusts are for?

You loan X amount to the trust (interest free) and the trust pays you back over 20 years i.e. at 5% per year.

The trust is, in effect, paying you out of its income but Gordon Brown is happy to treat the rapyment as a capital repayment.

After 20 years, what's left in the trust is (currently) outside of the inheritance loop. If you die within 20 years, the portion of the loan that is yet to be repaid is still treated as part of your estate but everything else (trust growth/income included) is exempt.

Of course...Gordon Brown can easily change the rules at the drop of a hat and he has in the past also made changes retrospective so be very careful not to enter into anything that will be difficult or expensive to unwind in the event that the tax net is eventually cast in your direction.

For instance, certain gifts to discretionary trusts are only now being tested in the courts - those who opted to gift their half of a house to a trust for the kids upon their death may postumously find that Gordon Brown rules this gift illegal (many years later) due to the surviving partner continuing to enjoy a disproportionate benefit from that gift by virtue of being the only person to live in the property. If that's the case, the gift will prove to be a complete waste of their IHT allowance. Instead, the *current* wisdom is that the executor should trade the deceased's half of the house for a beneficial charge for half the market value of the house prior to declaring what is to go into the trust. The charge will then be repaid to the trust from the survivng partner's estate upon his/her death. This doesn't shield the surviving partner's estate from the effects of rising house prices but it does at least get the first partner's IHT allowance used up. The only uncertain issue at present is whether or not stamp duty will be levied on the trade - to the best of my knowledge, the courts are still deciding upon this issue.

One thing that I find quite interesting generally wrt IHT efficient trusts is that, despite the lack of information on this subject, if you push the financial providers hard enough they will eventually admit that you don't actually have to buy one of the financial products that they are trying to sell you in order to set a trust up. Cash will be just as acceptable. It's just that it's not in their interest to tell you this. However, you may need to go to a solicitor to set a cash trust up as the financial institutions simply can't be bothered to do it for you.

The reason I mention the above is that I'm looking into this as we speak and the plan is for my mum to provide a mortgage for one of my brothers via a loan trust with my brother's mortgage repayments providing the trust income to pay for my mother's annual 5% repayment from the trust.

Of course...if needs be, my mother can call back the entire pot at any time by getting the agreement of the beneficiaries to pay it back - if anyone objects, she has the ultimate sanction of removing that person from the beneficiaries list. So, it boils down to only having to trust one of the beneficiaries (in this case, me) and striking out everyone except the one person that you trust to agree to the repayment.

Once again...I must repeat that, while I am generally clued up, I am in no way an expert in these matters and I am in no way officially qualified to give financial advice. If there's anything above that you believe to be untrue, please do speak up as we wouldn't want to give the readers of this forum the wrong impression...especially where such things as inhertiance tax are concerned.

HtH
RM

We set up a trust similar to the one you describe above whereby there is now a loan on my mums property which will get paid into the trust on her death. Do you know what the tax implications are on this loan and the new rules on taxing POA?? At the time the solicitor assured me no tax would be payable within this trust since it only contained the loan however I am not convinced.