Planning ahead to handle IHT on property - what options? and Equity Release?

BrunoM

Hi all,

Situation as far as I know it, is as follows:

my parents are 70 and 60 (my 70yr old father has just retired and my 60yr old mother works semi-full-time). My dad has a couple hundred k worth of private pension just kicking in, my mum has no private pension but I assume will start receiving state pension when of the age, and intends to stop working in 2 years.

They own a nice large 4-bed house on the edge of Highgate that is certainly worth at least £600k, possibly a fair bit more (separate studio at end of garden, larger than most of the other houses on the street, etc), once done up. They're about to spend c.£20k on extending the back of the house to enlarge the kitchen and address some cracks in the walls etc.

They don't have large cash savings or investments outside pension and house (but more than "none" I believe).

My mum has asked me to find out

a) what options there are which might reduce the impact of IHT in the future (there are 3 of us children, liable to be an equal asset split across us); they don't feel too convinced about just gifting us the property now!

b) how equity release mortgages can work - is there maybe a link to a basic guide somewhere? They are loosely contemplating the possibility of moving to Europe for retirement, or anyway freeing up some cash to live nice lives, but no set plans yet and no idea on options.

Sorry for long-winded post, I am not too sure which of our individual circumstance details are important for the questions above and which aren't! If I missed anything important it may be because I don't know it, but can probably ask parents...

Andy_L

for a) research discretionary will trusts (there's been a few threads here & a googling will throw up loads of hits).
In essence the first to die uses their IHT allowance to set up a trust for the benefit of the survivor & heirs & passes the remainder IHT free to the spouse. On the 2nd death they survivor uses their allowance to pass on their assest & the trust is then divided among the heirs IHT free as well

Ian_W

And in respect of b] try the following links:
https://www.ageconcern.org/AgeConcern/Documents/Raising_income_or_capital_from_your_home_FS12.pdf

https://www.helptheaged.org.uk/NR/rdonlyres/84198B3B-A3D7-4FA7-85DD-69DA36696F8D/0/equity_release_advice_guide.pdf
AND
https://www.ship-ltd.org/

BrunoM

Sounds like equity releases are in fact pretty dicy concepts and to be avoided unless in real need. Thanks for the info both of you

madbazoo

Suggest you talk to a solicitor about the discretionary trusts already mentioned.

Property is usually owned in 'joint names' but you should also consider changing this so it is owned as 'tenants on common' as this can be used to pass each parents share to the beneficiaries on death and therefore relieving the burden from the other partner.

Money can also be shared equally to equalise the estate ensuring that half the estate is passed on the first death.

All this can be carried out by a good solicitor through a will trust.

cheerfulcat

They are loosely contemplating the possibility of moving to Europe for retirement, or anyway freeing up some cash to live nice lives, but no set plans yet and no idea on options.

BrunoM, would your parents contemplate selling the house and using the proceeds to fund the nice lives and/or move to Europe? This would, I suspect, be less stressful and more cost-effective than equity release, for which they are a little too young IMO.

Also, they should be aware that any IHT mitigation tactics that work under the UK tax system may not apply if they retire abroad. France, for example, does not recognise the concept of trusts IIRC. And of course some countries do not have IHT...

Then there is the state pension. UK state pensioners in some countries are disadvantaged in that they do not qualify for automatic increases in pension; have a look here.

exil

French inheritance tax - starts at 50,000 euros (£30,000). But it starts at a low rate and builds up.

Spanish is fairly similar.

If you want to pass on 100% of your property - live in Italy, IHT there was abolished in 2001.

EdInvestor

Pensions are not included in the estate, so they are covered for IHT by the two nil rate band allowances of 300k (from April) each - just switch ownership over to tenants in common via the land registry and make sure they understand the concept of "nil rate band" trusts.

They would certainly be much more sensible to sell the house and trade down to generate money for income/ investment/moving abroad than to use equity release at this point.

Get a forecast for state pensions here:

https://www.thepensionservice.gov.uk

It's useful to know that you would need a pension fund worth 120-130k these days to get the equivalent income provided by the basic state pension.