should i be worrying about inheritance tax?

snooping_around

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grey_gym_sock

no, you shouldn't worry, because if (for instance) your parents have 1m when the second one eventually dies, you'll be 860k better off, despite paying 140k tax.

(somehow, i don't think that will be a popular answer.)

however, there is nothing wrong with planning to minimize tax.

adding your name to the property your parents live in may fail to take it out of the reach of inheritance tax, because of the rules about "gifts with reservation", i.e. if they are retaining the right to live there, inheritance tax may still apply. also, if you own part of a house while not living there, you may become liable for capital gains tax if its value rises (whereas they are exempt, as owner-occupiers). so in the worst case you might be hit with both IHT and CGT. i'm not sure whether there's some way round these problems, but i wouldn't try doing this without first getting specialist advice.

the much simpler solution is for your parents to give away some of their cash+ investments (and then live for at least 7 years after the gift). obviously this is only sensible if that leaves them enough to live off, but there may be some scope for this to work.

in a minute, somebody will be along to talk about nursing care homes and "deprivation of assets".

the 650k exemption applies if they are married, and the first to die leaves at least 325k in assets to the survivor. single persons have a 325k exempt amount. whatever married couples leave to one another is completely exempt. so it's 650k exempt at the second death.

milla

snooping_around wrote: »

Hi all

My parents are in their late 50s, own a property worth around 500K and have about 500K in cash+investments. This does not include pension schemes and life insurance they are paying into.

My parents and I are worried about inheritance tax which we believe is 40% for any inheritance over 750K (325K * 2).

We are looking for advice regarding firstly if we should be worried about inheritance tax and if we should be preparing for it now? They are happy to include me on the name of the property if it helps, but are there any other complications?

Many thanks
J

Isn't £325K x 2 £650K not £750 K ?



Increased threshold for married couples and civil partners

Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies - to as much as £650,000 in 2012-13. Their executors or personal representatives must transfer the first spouse or civil partner's unused Inheritance Tax threshold or 'nil rate band' to the second spouse or civil partner when they die

xylophone

Your parents should each make a will through a solicitor experienced in wills and trusts.
http://www.step.org/system_pages/call_to_action_navigation/member_search.aspx?link=header-menu
Before they go they should do some reading http://www.hmrc.gov.uk/inheritancetax/pass-money-property/index.htm
http://www.howto.co.uk/family/making-a-will/inheritance_tax_and_saving_tax_by_your_will/
And there is some useful reading here http://www.primewills.co.uk/will_writers_cambridge.htm have a look at property protection will etc

just for information before your parents take professional advice appropriate to their situation

oldvicar

I remember attending a seminar a few years back, where a well known firm was trying to sell fancy IHT mitigation schemes to poor old rich people. They did explain the schemes which typically used their inverstment funds, but judging by the looks on peoples faces it went over their heads and so they might just as well have been selling snake oil.

Then the rules changed (significantly the transferable allowance for spouses was introduced), and many of those who bought the costly fancy schemes will have lived to regret it, possibly lost a bit of money, and wished they hadn't bothered.

The 'free' lunch provided after the seminar was very nice though.

webmasterpolo

Hi

Lot's of good points already covered like-
-gifts with reservation
-CGT
-650K not 750K

Simple process for your parents to follow:

contact an IFA, get advice, this will cover their personal circumstances and will include recommendations on will structure, eg 100% to each other on 1st death, and recommendations to reduce the tax bill if appropriate.

There are many options like gifting, AGA, trust funds, life cover, uncrystalised pensions etc etc.

As a prompt, your correct IHT is 40%, so it the estate is exactly £1m, (including the oft forgotten cars and house contents) it would amount to:

£1,000,000 - £650,000 = £350,000 taxable estate
£350,000 x 40% IHT = £140,000

It is possible the IFA could put together recommendations to reduce this to £0. £140,000 for maybe 4 hours of meetings with an IFA, £35,000 per hour, well worth the time.

-Web

jamesd

Giving things away is typically the easiest and often the most efficient way. Gifts to children and even better to grandchildren because that skips the problem of the inheritance tax bill for the estate of the children's parents and protects the money in the interests of the children if their parent divorces or dies.

Gifts also get the people making the gifts a chance to see the long term benefits to the life of the recipients instead of being dead before it happens. The recipient can use the gift without the sorrow of losing a parent to accompany it.

The giver can ask the recipient to agree to non-binding ways of using the money. Say to invest it and only spend the income generated, not the capital.

An IFA is the first place to go for planning and advice of this sort.

noh

Another option, not often mentioned, is to enjoy the money instead of worrying about it.
Spend some of the money on doing things they enjoy instead of trying to leave the maximum amounts to the children.

JulieM

There's a thread about inheritance tax planning on the Cutting Tax board.

snooping_around

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soay_2

Another way to remove some capital from inheritance tax is for your parents to include your name on joint savings accounts as provided they then live for 7 years this one third share would not be subject to inheritance tax.

Always keep records of the date any capital is transferred in this way & also keep all paperwork for any subsequent closed accounts or money moved to new accounts.

Thus when you have to complete inheritance tax returns, hopefully in the distant future, you will have no problem proving that the capital was transferred more than 7 years ago.