Inheritance Tax

redpin_2

I'm looking for advice for relatives; they're concerned about losing a huge sum of money to the tax man. I was thinking of several things that can be done to avoid the inheritance tax burden- with the understanding of the 7 year rule, but at the same time not have to sell the house.

One of the things i was thinking is to spread equity of the house to another family member (just the money that would be over the threshold!) would something like this be possible; how would it be done?

Another thing was mentioned about trusts; what does that involve?

Thanks

xylophone

http://www.hmrc.gov.uk/inheritancetax/intro/basics.htm
http://www.hmrc.gov.uk/inheritancetax/pass-money-property/exempt-gifts.htm
http://www.hmrc.gov.uk/inheritancetax/pass-money-property/pass-home-to-children.htm

If your relatives (husband and wife) have an estate large enough to be concerned about IHT, expert advice from a solicitor expert in wills and trusts would be appropriate? http://www.step.org/system_pages/call_to_action_navigation/search_for_a_step_member.aspx?link=header-menu

John_Pierpoint

Pretty good place to start:
http://www.amazon.co.uk/Giving-Inheriting-Which-Essential-Guides/dp/1844901181

If you buy the three "Which?" books you will be set up ready for the grim & inevitable.

This is a very complex area and as far as I know there is no easy way, when the relative is already over 70 and so in the danger zone of not living 7 years.

They could even find themselves paying Capital Gains Tax (CGT) now, the very top rate of Income tax on the money in the trust followed by being accused of "deprivation of assets", should they apply for local authority support on discharge from hospital, then pay Inheritance Tax anyway because they died too soon.

When you have learned the basics, you will be in a position to understand the advice of the expensive "professionals".

Remember, at this moment appeals to higher courts could be changing the advice you are given and next weeks budget could "close another loophole"; so in the time (shall we say 15 years ?) after you set up the arrangements to skirt round IHT, you will need to double check constantly the situation and the plan might fail anyway.

redpin_2

Thanks, just looked at the contents of the which book and it looks very useful. I've looked at the HMRC website too, which gives me a better understanding; but i will suggest about seeing someone with their questions they have as it sounds quite complex.

I can easily see what your saying about the government closing schemes that avoid IHT!

I've got another question regarding equity (waiting for which book to arrive)! If i gave my grandparents £200k towards their house of £1million and said i wanted 40% equity, would this work like an equity release scheme? that way they'd own just 60% (£600k) between them - the nill band rate?

kidmugsy

redpin wrote: »

One of the things i was thinking is to spread equity of the house to another family member (just the money that would be over the threshold!)
Another thing was mentioned about trusts; what does that involve?

Common advice is to deal with all other assets before you try and deal with a house: if you get the latter wrong you can end up with more tax being paid.

Trusts: the idea is that you give away assets not directly to beneficiaries (who might lose it by !!!!lessness, bankruptcy, ill-judged marriages, or whatnot) but instead to a (usually) Discretionary Trust where the Trustees look after the money on behalf of the beneficiaries. The grandparents could appoint themselves as the Trustees and hire the services of a lawyer and a financial advisor for the Trust, as required.

Anyway, on either topic they need to see a lawyer.

edit: N.B. a non-obscene word for "rash with money" has clearly been censored here. Is this American software?

sleepless_saver

redpin wrote: »

I've got another question regarding equity (waiting for which book to arrive)! If i gave my grandparents £200k towards their house of £1million and said i wanted 40% equity, would this work like an equity release scheme? that way they'd own just 60% (£600k) between them - the nill band rate?

So you'd be buying 20% of the equity and they would be giving you 20%. That gift would be a gift with reservation as they are still living in the house so inheritance tax would still be due on £800000.

redpin_2

I was thinking 200k for 400k worth of percentage I.e. 40% but not paying 40% if you get my drift lol. Thanks, that's very useful advise on the trustees, that sounds like the least complicated route as its already practiced by I assume many others.

sleepless_saver

redpin wrote: »

I was thinking 200k for 400k worth of percentage I.e. 40% but not paying 40% if you get my drift lol. Thanks, that's very useful advise on the trustees, that sounds like the least complicated route as its already practiced by I assume many others.

As far as I understand it, the inheritance tax liability will be assessed on the market value of the property at the time they disposed of the equity, so your 20% can't buy 40%. That's why the other 20% would be regarded as a gift - because you would have bought it at less than market value.

grey_gym_sock

suppose the £200k is buying you a right to 40% of the value of the property when the 2nd grandparent dies, but no right to receive rent or interest before that date. due to the deferred return, £200k might be the market price - certainly £400k would be too high. this is after all roughly how some equity release schemes work; and you could compare to the typical discounts they use, to make sure you have a realistic figure.

however, you would have a large capital gains tax bill when the 2nd grandparent died. though at no more than 28%, which is at least less than 40%.

they also would presumably give away the £200k, which would only save IHT if they live 7 years. they could each give £100k, to spread the risk, unless 1 has higher LE. though the IHT on the £200k "discount" would be saved immediately.

John_Pierpoint

kidmugsy wrote: »

Common advice is to deal with all other assets before you try and deal with a house: if you get the latter wrong you can end up with more tax being paid.

Trusts: the idea is that you give away assets not directly to beneficiaries (who might lose it by !!!!lessness, bankruptcy, ill-judged marriages, or whatnot) but instead to a (usually) Discretionary Trust where the Trustees look after the money on behalf of the beneficiaries. The grandparents could appoint themselves as the Trustees and hire the services of a lawyer and a financial advisor for the Trust, as required.

Anyway, on either topic they need to see a lawyer.

edit: N.B. a non-obscene word for "rash with money" has clearly been censored here. Is this American software?

Don't forget that if the trust is worth more than £325k the government gets excited that it could "live" more than 100 years, unlike humans who conveniently tend to leave their money every generation (30 years). So the government regularly visits the larger trusts with a demand for a wealth tax (they call it IHT but nobody has inherited anything).

The "Which?" book explains.

The earning of £325k (actually you need "headroom" to avoid exceeding the £325k tax trigger) won't pay for much "advice".
Bit of fuss here about a random wealth tax imposed on a f-e-c-k-l-e-s-s nation.
https://forums.moneysavingexpert.com/discussion/4499663.

The censorship is because the forum does a good job trying to help the financially illiterate, who manage to pluck up courage to confess their problems.
Telling such debt free wannabees the truth about their behaviour immediately, tends to put them on the defensive.
[The politicians, their Guardian reading teachers and their hapless parents, have sold them a dream, and induced an unrealistic "entitlement" attitude]

John_Pierpoint

grey_gym_sock wrote: »

suppose the £200k is buying you a right to 40% of the value of the property when the 2nd grandparent dies, but no right to receive rent or interest before that date. due to the deferred return, £200k might be the market price - certainly £400k would be too high. this is after all roughly how some equity release schemes work; and you could compare to the typical discounts they use, to make sure you have a realistic figure.

however, you would have a large capital gains tax bill when the 2nd grandparent died. though at no more than 28%, which is at least less than 40%.

they also would presumably give away the £200k, which would only save IHT if they live 7 years. they could each give £100k, to spread the risk, unless 1 has higher LE. though the IHT on the £200k "discount" would be saved immediately.

Don't forget that the occupier has to pay full market rent (on which someone will be paying income tax) to avoid retention of benefit rules making the asset liable to IHT regardless. Just as being the beneficiary of an interest in possession trust makes the trust liable to IHT as if it was legally owned by the beneficiary.