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

Keep_pedalling

richies said:

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 :-)

Her main problem is that she has far too large a portion of her wealth tied up in her home. The obvious solution is to down size, and use some of the equity released as gifts. 

Alanbroomfield

Subject Inheritance Tax 
What are options to reduce inheritance tax as we are considering transferring ownership of our property when we both pass away. Someone was telling me there is a seven year rule  How does that w ork???

Doc_N

Alanbroomfield said:

Subject Inheritance Tax 
What are options to reduce inheritance tax as we are considering transferring ownership of our property when we both pass away. Someone was telling me there is a seven year rule  How does that w ork???

Huge question, huge subject - huge resource:
https://www.which.co.uk/money/tax/inheritance-tax

[Deleted User]

Alanbroomfield said:

Subject Inheritance Tax 
What are options to reduce inheritance tax as we are considering transferring ownership of our property when we both pass away. Someone was telling me there is a seven year rule  How does that w ork???

Hopefully this can be moved as a new thread. I presume that you mean to transfer before you pass away and that it is your main residence? 

If so, don’t. This a very common question on here and, invariably, a costly error.

Firstly, if you continue to live in it, it will be classed as a gift with reservation. For IHT the transfer will be deemed effectively not to have happened and will remain in your estate.

Secondly, if you transfer ownership to, say, your children, they will be liable to pay Capital Gains tax on the difference between any future sale price and the value at the date of the gift.

The house, currently, free of any taxes would now be subject to two.

Thirdly, the beneficiaries would no longer be first time buyers and there are stamp duty issues, about which I know nothing.

Fourthly, check ‘deprivation of assets’ in the event that either of you require care in the future.

Keep_pedalling

Alanbroomfield said:

Subject Inheritance Tax 
What are options to reduce inheritance tax as we are considering transferring ownership of our property when we both pass away. Someone was telling me there is a seven year rule  How does that w ork???

It doesn’t as Dic-N has already pointed out. You can however gift more liquid assets if it not going to impoverish you. Do you know for certain if your joint estates are even in IHT territory? A couple with children can pass on up to £1M tax free.

Eibbed58

I am married have a property worth £1 million in Joint Tenancy, I have investments worth just under £300,000. My husband has investments too but I don't know how much.

Should I keep the will I currently have which leaves all to my husband, he has a mirror will leaving all to me?

Or should I sever the tenancy so that we each own 50% and have new wills produced which leave half the property equally to our 2 adult children?

I want to avoid IHT and I don't want to be in the position of having to sell the house if I end up having to pay for my own care home fees when I am a widow.

Jeremy535897

Currently the first spouse to die can pass any unused nil rate band and residential nil rate band to the surviving spouse, so what you propose is unlikely to achieve anything in inheritance tax saving, and could have adverse consequences for both capital gains tax and stamp duty, as well as loss of control over your home. If you really want to do something to save inheritance tax, and are likely to live more than seven years, you have to make outright lifetime gifts now in which you reserve no benefit.

Savvy_Sue

With an estate of that size, please get some proper advice!

Keep_pedalling

Changing you will will not reduce the amount of inheritance tax your estate may eventually pay, and could mean it is payable on the first death which is not the case with your existing wills.

if you are unfortunate enough to be widowed and then need residential care, what does it matter if your house is sold you will have n9 need for it any more?

As Sue says, get some professional advice.

perdusys

I am one of three people with POA for my widowed sister in law, who has been in a care home since having a stroke last August.  She owns a house currently worth around £650K and has no children.  Her will at the moment has her estate left to two sisters in law and her brother, and three charities in equal shares.  We are wondering what would happen to Inheritance tax on the estate, if the charities are exempt does that value come off the tax liability or do the remaining beneficiaries bear the tax due on the total estate?  I think it is too late for any IT planning, as we cannot make changes under her POA, though she has been deemed to have capacity and can make her own decisions if explained to her carefully.