Inheritance Tax: Save £100,000s with simple advanced planning Article Discussion

MrChips

Thanks for your reply

My dad is her only child and her (ex) husband died 8 years ago. As far as I know, she is leaving all her estate to my father, but he is quite happy to pass most of it on to me and my sisters (I have 3!). I am the only one in the family with any kind of "financial know-how" so I have the responsibility for looking into this side of things.

I am trying to understand your point about taper relief. Are you saying if she makes a gift of £300k then lives for 4 years (say) then even though taper relief of 40% applies for PETs after this time, it is only for the value of PETs which take it over the nil rate band (and these are counted before other assets in terms of eating into the band)?!

If this is the case, she (well ok, we!) would be best off making a gift of nearly everything, leaving her with enough to pay her care home fees. Sounds heartless I know...

MrChips

Probably easiest to demonstrate my understanding (or not!) with an example.

Say she made a gift of 500,000 and died after 3.5 years (and say nil rate band stays at 300,000). She has another 300,000 of assets at this date too.

Does this mean the inheritance tax bill is £64,000 for the recipient of the gift (i.e. 0.4 * (500000 - 300000) * 0.8) and £120,000 (300000 * 0.4) on the other assets?

localhero

Yes, that's correct MrChips.

To obtain the benefit of taper relief, gifting more than £300,000 is necessary. Perhaps one (albeit drastic) option is for her to distribute her entire estate now and hope to survive 3 years or more. Her care fees could be met by the recipients of these gifts.

Another option is to replace all or most of her assets with assets exempt from IHT. Assets with this generous exemption include agricultural or business assets. Certain types of shares - in particular, many traded on the AIM market count as business assets, and if owned for 2 years prior to death are completely exempt from IHT.

Again, this is slightly risky, as the shares could fall in value (or likewise rise) - so particular care is required. This market is less regulated than the main market, but that said, there are some sound companies out there.

If she survives 2 years, the tax saving could be up to £200,000.

Tough choices are required and you will need to seek advice, but tax planning even at this late stage is not insurmountable. Best wishes.

MrChips

Your help has been invaluable, thank you very much. Armed with this information I will be able to move this forward much more efficiently. My father is seeing a solicitor on Monday so I'll pass this onto him.

As a point of interest, my job is concerned with life expectancies and the life expectancy for a 98.5 year old female born in 1909 is a little over 3 and a half years so plenty of reason to make some plans even at this late stage

localhero

That's an interesting fact Mr Chips (I am guessing you are a pensions actuary).

I agree that you have nothing to lose, so I personally would take action. Good luck with everything.

EdInvestor

localhero wrote: »

That's an interesting fact Mr Chips (I am guessing you are a pensions actuary).

Surely not, otherwise he would have been on the IHT case much earlier.;)

Mr Chips should be aware that gifts made out of income (as opposed to capital) are completey IHT free as long as they don't impact the giver's lifestyle.

Might be some flexibility there.

What are the arrangments for paying her care fees?

MrChips

EdInvestor wrote: »

Mr Chips should be aware that gifts made out of income (as opposed to capital) are completey IHT free as long as they don't impact the giver's lifestyle.

Might be some flexibility there.

What are the arrangments for paying her care fees?

Her income pretty much covers her care fees which are about £2000 a month.

In my opinion, she could give away all her income and pay fees out of capital and her lifestyle would be in no way impacted - she is already in a care home so her lifestyle has already been substantially affected.

rainy-day_3

Hi localhero,

Forgive this late acknowledgement. I've been away for a few days and there have been many new posts between your reply and this response.

A big 'thank you' for your advice, and 'good luck' to everyone else who is battling with IHT. What a relief it will be when Mr. Cameron & Co raise the threshold to £1million!

MrChips

I see the inheritance tax threshold has been raised to £600,000 for "widows". Would this apply to my grandmother in the case above??

http://news.bbc.co.uk/1/hi/business/7035449.stm

From my reading of the situation, it would appear not as she got divorced over 50 years ago.

Can anyone confirm?

Jonbvn

MrChips wrote: »

I see the inheritance tax threshold has been raised to £600,000 for "widows". Would this apply to my grandmother in the case above??

http://news.bbc.co.uk/1/hi/business/7035449.stm

The IHT threahold for couples and widow(er)s is increased to 600k. Does this mean unmarried/single people still only have a 300k threshold?