Inheritance Tax planning for the house when passing on to children

andyuk2005

Hi All!

I'm going through a few points with my parents for estate planning at the moment, and was hoping one of you knowledgable people might be able to help?

The estate between them is well over the couple's threshhold, so planning is essential to minimise the IHT bill.

One of my ideas was to some how pass down some of the house to us 3 kids, as it makes up a large part of the estate. I was thinking down the route of handing it down 7 years before anyone kicks the bucket to avoid any IHT.

Now, my parents are living in it (along with one of the kids at the moment) so naturally the whole house can not be passed down as it would be classed as benefits inkind and so will not be considered a gift and will incure IHT.

I was thinking is it possible to pass down say half of the house, and split that between us 3 kids? (BTW we are all over 25 if that makes a difference to any rules!) Would that situation still leave the house as a benefit in kind for my parents and still make up part of there estate? Or is there any combination of splitting ownership that leaves the handing down of the house as a gift? I've had a thorough look and can't find any clear information on this! Seems like HMR&C don't seem too keen on telling us!

I thought that if there is no way of passing down the house whilst it's still being lived as a gift, directly to avoid IHT(considering the 7 year rule) is there a way to say, put it in (or part of) a trust? And the that of which is in the trust is passed on to us kids when the two settlors have passed? This also makes it suitable as if one of us kids find a partner, only to then divorce them, they will have no claim on the house while my parents are still alive!

I've had a look and it appears that certain tax rules apply when settling gifts in a trust, which then further may be taxed on exit or a '10 year anniversary'?!

Very mind boggling indeed, but if any one has the slightest clue on how to proceed, you'll be both doing a lot better than me :T and also help us a lot!

Andy

getmore4less

Get some expert advice it is a minefield.

Get it wrong and you have IHT AND CGT bills.

On assets over £650K it can get complicated

Get them spending is one option.

Also have to consider deaths of the next generation early.

property.advert

Well over £650,000 may well be in the millions. With 40% of that potentially at stake, some good tax advice would be in order and the cost of that advice has to be seen in context with the hundreds of thousands of pounds or more that it may save.

Loughton_Monkey

This is a complex, and to an extent 'individual case' issue so you can only be advised to go to an IHT specialist to review your particular situation.

getmore4less

Another point is that you need to consider at least three generations.

Them, their issue(you and siblings) and the next generation issue(grandkids).

THats asuming their parents are allready dead if not you need to include them.

margaretclare

How do you chop up a house into bits so that people can still live in it?

andyuk2005

Yep thought there might be a need for specialist advice, I was just wondering if anyone had any clue about splitting up the house and still being able to live in it, without it being considered benefits inkind, and the tax implications of putting part of the house in a trust for us kids.

Thanks anyway I'll try and update you with how I get on with it!

andyuk2005

Just to keep you upto date, I did some further research and have found that an 'absolute trust (or bare trust)' is a trust which can be set up where gifts such as cash or assets (inc property) are treated as potentially exempt transfers. So if part of the house was put in the trust, because it is the main residence it would be tax free as long as no one kicks the bucket within 7 years.

So possibly the best option so far, all I have to work out now is whether there are any implications of having part of the house given away while it is still lived in.

Just by chance does anyone know whether the trust can be set up with the condition that the trust does only pays out to the beneficiaries on death of the settlers?

andyuk2005

A further update:
If say half of the house was put into a bare trust for the kids, us kids will all have to live in it for it not to be considered a 'gift with reservation of benefit'. So that's not an option!

I can't see any other option available to reduce the tax bill, I think its a closed case folks!!

MeToo

You may have considered but not mentioned some other factors to get advice on:
Pensions bypass trusts (depending on your parents' current pensions plans)
Insurance: You (all of) pay the IHT due but insure to cover it. This insurance I gather can be paid/part paid by your parents to reduce their liability. You maybe can buy cover for just part of the liability.
This is likely to be expensive but simpler in the long run especially in your extended family circumstances.

The simplest plan of all is to love HMRC more than all your relatives (famous chancellor's quotation: I think it was worded 'hate less') and just smile while HMG burns your full IHT liabilites - in nanoseconds.

That way you allegedly only lose cash not family bonds.

Even then families will disagree and chancellors will disrupt under DOTAS and GAAR regulations ..
:mad: