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

SiSenor2020

Can someone please give me some advice, I have two properties, both worth in the region of £400,000. In my will, my properties will go to both of my sons. My elder son will get the property I rent out and my younger son the property we live in. Will they pay inheritance tax on £800,000 or if I split it evenly £400,000.

Savvy_Sue

The inheritance tax is due on the value of your entire estate, it doesn't matter how you split it. However there are various exemptions for the family home passing to direct descendants. You really need to get some paid for tax planning advice, and maybe get your will looked at too. If your intention is that each son gets roughly half your estate, that may not be achievable with two quite separate properties and leaving one to each - especially if you disposed of either of those properties without updating your will, eg if you had to go into care and sold your house to pay for it, or found continuing to run a rental property too demanding and no longer a worthwhile investment.  

Keep_pedalling

SiSenor2020 said:

Can someone please give me some advice, I have two properties, both worth in the region of £400,000. In my will, my properties will go to both of my sons. My elder son will get the property I rent out and my younger son the property we live in. Will they pay inheritance tax on £800,000 or if I split it evenly £400,000.

It is never a good idea to leave specific properties to your children as you propose to do. What happens if one of these properties has be sold to fund care costs? One son could end up effectively disinherited.

Keep it simple, spilt the whole estate 50/50 and let them sort out what they do with the properties. 

Doc_N

Just to echo previous advice, this is a situation in which proper financial/legal advice should be sought.  IHT is payable on the total value of the estate, but there is potential for tax saving.

lelrich

My partner and I live in separate properties in England.. We are currently neither married nor in a civil partnership. If we were to contract a civil partnership and remain in separate houses and I died, would he automatically be able to inherit my property tax free? I should add that it is worth c.£380 000 at present. If we were not in any marriage or CP and I left it to him in a will, would IHT be payable? (I also have a Discretionary Trust on a Life Assurance Policy which expires in February 2022 so amount s payable would be outside of the IHT) Many thanks. Lesley

pphillips

lelrich said:

My partner and I live in separate properties in England.. We are currently neither married nor in a civil partnership. If we were to contract a civil partnership and remain in separate houses and I died, would he automatically be able to inherit my property tax free? I should add that it is worth c.£380 000 at present. If we were not in any marriage or CP and I left it to him in a will, would IHT be payable? (I also have a Discretionary Trust on a Life Assurance Policy which expires in February 2022 so amount s payable would be outside of the IHT) Many thanks. Lesley

Presently, your estate would be liable for IHT on the amount left to your partner above £325,000. You should be able to leave the life policy in trust, so that it falls outside your estate for IHT purposes.
However if you were in a civil partnership then your estate would pay no IHT on anything left to your partner, this is because civil partners are classed as IHT exempt beneficiaries. Therefore, it is usually better IHT planning for the life policy to go to a non-exempt beneficiary.

Keep_pedalling

Not being married or in a CP would lead to an even bigger IHT bill on the second death.

richies

My mum and dad are married but separated - my dad signed the house (worth approx £1m) over to my mum as part of their financial separation. My mum is now worried about the IHT / inheritance burden this will one day place on my sister and I. She is prepared to gift the house to us, and will most likely live beyond the 7 years to make this potentially exempt from IHT. She wants to remain living in the house for as long as possible, but isn't really in a position to then pay us a market rent on the property in order to negate a "reservation of benefit" on the gift. 

Our question is what happens if my  mum gifts 1/3 share to my sister and 1/3 share to me, and continues to live in the property (alone). If she has gifted 2/3 of the property, would she then only need to pay us 1/3 of the market rent in order to avoid the "reservation of benefit" issue, and would IHT then be due only on her 1/3 share?

Also as she solely lived in the house, is there still a 10% discounting on the valuation of her share (because of a Joint Tenant setup in the title), and is the valuation of her share all that counts towards the £325,000 IHT threshold for her estate as far as the property goes? Does she also benefit from the £175,000 tax-free allowance, or just a 1/3 of it because she only has 1/3 share, or does the allowance not apply at all?

I think she is understandably reluctant to relinquish the full 100% ownership as a gift to my sister and I, which is why we have all these questions. Maybe we are missing a more obvious solution?

Thanks :-)

Jeremy535897

Apart from all the issues around ensuring a market rent is paid, and the income tax consequences (taxable rent, possible POAT regime), I think the obvious problem with your suggestion is that she would have to pay 2/3 of the rent if she gave 2/3 away, not 1/3.

Doc_N

There are a number of issues here which could cause problems if they're not handled in precisely the correct way to avoid paying more tax than necessary. 

Seriously,  I'd be inclined to talk to an Estate Planner or a solicitor.  Too much at stake perhaps for an amateur?