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

Dave-Geo

Thanks to you both for your replies.

First of all I see from my first post that I did not say that this will end up being the primary residence for all three of us, I assume that makes a difference!

My mother in law is widowed and at that time my father in laws IHT allowance was used up so there will only be my mother in laws allowance available. Apart from the house she will retain control of the rest of her estate and does not intend giving any of it away during her lifetime.

The house is in a rural location on a large plot, the plot would probably take 10 houses but under the current planning regime permission would never be given for more than one dwelling. In fact we will have to provide a legal undertaking that the old property will be demolished and this will have to be carried out within 6 months of the new house being completed.

The new house will be approx 320 Sq M so quite a substantial property. The build is fairly straightforward with a nice level plot and little ground works required, all services are of course already in place. We are looking at about £ 1000.00 per Sq M for the build cost which should provide a very good specification and we then still need to fit out the new house, demolish the old, landscape and have a bit left over for contingencies hence the 400k budget. The property is located near Portsmouth.

My mother in law is 77 and fit and well for her age. My wife has one brother who is well off and is happy to go along with the plan fully understanding that he will not inherit as much as my wife and possibly nothing at all.

Maybe I should add that we are not too worried about the final IHT position although it is of course a consideration, we would be happy if the remainder of the estate was used to pay any tax. What we are more concerned with is if we would have to pay any money when the property is handed over to us. Would we have to pay 20% as a lifetime gift and would we have to pay stamp duty?

As for CGT would the property be exempt as this will be our primary residence?

Thanks again for your help,

Dave

localhero

Hi Dave-Geo,

As I understand it your mother in law owns a house worth £500k and has other assets worth approximately the same amount.

On that basis her estate would face IHT of £275,200 under the current rules.

By building a new house which would be worth £900,000, split three ways with your mother in law owning 20%, would mean her share of the property would be worth £180,000.

On that basis I would suspect that HMRC would argue that this reduction in the value of her estate would amount to a lifetime gift of £320,000.

This is known as a potentially exempt transfer (PET) and does not become immediately chargeable to IHT upon making the gift. Lifetime gifts made into certain kinds of trusts (known as lifetime chargeable transfers, or more recently immediately chargeable transfers) do sometimes attract a charge of 20% depending on the amount put in.

However after making a PET, the law says that if the donor does not benefit from that gift, then after 7 years the value of the gift will fall outside of their estate for IHT purposes.

I think if you all had an equal share (ie a third) in the property it could be argued that she's not reserving a benefit for herself from the gift, but I think in your case you will be caught be these rules.

Therefore, by my reckoning £120,000 will be deemed a gift with a reservation of benefit and added back into her estate for IHT purposes. So an £800,000 estate will suffer IHT of £195,200.

In the last couple of years has seen the emergence of a new type of tax known as pre-owned assets tax (POAT) which is an income tax paid by the donor on the value of the benefit retained. Google it for more info - and that might be an option for your mother in law instead of having the £120,000 added back into her estate for IHT.

I suspect that she is taking a smaller share of the house to reduce the value of her estate, but this is problematic and I think there are better options.

If her share was a third (assuming your estimate of a £900,000 house is correct) and her savings were held in assets that offer attractive IHT reliefs her £275,000 liability could be completely eliminated.

For, if her other assets consisted of shares in the Alternative Investment Market, and owned for 2 years upon death, they would be regarded as 'business assets' and would be exempt from IHT.

Perhaps a better alternative in the current climate of high commodity prices, is assets consisting of agricultural or forestry property. These have produced enormous returns recently and there are IHT friendly funds available if she doesn't want to purchase a real farm or forest! Again these assets if held for 2 years prior to death will be completely exempt from IHT.

She will obviously need to seek professional advice from somebody in this field as with everything, there are some risks.

If after all that, her third share of the house exceeds the value of her nil rate band, then you might want to consider building a self contained annex or 'granny flat'. Then you would be able to show that her share was 20% or less and therefore not falling foul of the reservation of benefit rules.

I'm no expert on CGT or stamp duty, but I don't think there would be CGT on the 'disposal' as it involves her principle residence.

I suspect there may be stamp duty on the new build, as I recall reading somewhere that anything exceeding 125 square metres is liable. You can also reclaim the VAT on new builds. You will need to double check the stamp duty issue with HMRC's Stamp Taxes Helpline on 0845 603 0135.

You might also like to research the announcement that Gordon Brown made recently about a 0% levy on new build homes that are carbon neutral.

And finally, all three of you should make an up to date Will that will offer protection and certainty to the others in the event of any of you dying.

This transaction is definitely something you will need to consider very carefully and must obtain decent professional advice on, but I hope I have given you a few helpful pointers.

ian2deep_2

localhero wrote: »

Hi Ian2deep,

In order to make a more informed decision you will need to consider the following and let us know:

1) What is the current value of the trust fund?
2) What is the total value of your father's assets and what do they consist of?
3) What is your father's state of health?
4) If he required care later on, would you like your mother's estate (ie the assets in the trust fund) safeguarded from the liability to care fees.
5) Would you like to safeguard your mother's estate from your father remarrying or frittering it away?

Hi Local Hero,
Sorry for the delay in replying. It was a mixture of holiday and getting the info. together. Answers as follows:-

1) Current value of the "trust fund" is £207k which includes half value of house at mum's probate (£140k) + £67k savings.
2) Total value of father's assets is £385k -half value of house (£140k) + £245k savings.
3) Apart from general creakiness, dad's health is not bad.
4) Difficult question. Yes, although with so much in his own savings, we are almost of a mind to pay the fees out of interest from all the savings accounts he (and mum's estate) have and ignore Social Services. We have only bad feelings about them!
5) We think dad is very unlikely to remarry and he is of the generation who keep saving for that rainy day -although I have alerted him to having too much money above the IHT threshold.

One further question. If we formed a Trust, can my father put money into it -if he wanted- so that the value is increased to say £280k ? He would of course be benefiting as he receives the income.
Thanks
Ian2deep

martinm_2

Sorry to jump back to my posts on page 11 but I have all the money side of Mum's estate on paper now so it is form filling in time. Looks like I will have need to send for copies of her birth and marriage certificates along with my fathers.... looks like I need to fill in IHT200 and IHT216 ?? but the latter says you have 24 month to fill it in but only 6 month for IHT200?

Also, just in case, what happens if your going to be late with IHT200 ?

Thanks

Martin
Quote:
Originally Posted by martinm
Yes it was all passed to my mother, both my brother and I was living at home at the time. All my borthers money went to my mother when he died, I moved out 7 years ago but who has the NBR I thought that was me and it was fixed at 300,000 pounds?

Martin

As all your father's estate passed directly to your mother, your mother was able to use you dad's allowance as well as her own. This was the change announced by Gordon Brown in his last budget. The good thing for your mother was that the change was retrospective and allowed your mother to regain that allowance which she would not otherwise have had.

As the allowance was £300k on your mother's death 4 weeks ago, she had her own allowance plus your father's allowance so a total of £600k. So no inheritance tax is due at all.

margaretclare

Hi Ian2deep

Don't be too certain that Dad may not remarry!! I would have said that about myself a few years ago, in fact I'd have put money on it. The impossible happened - following widowhood in 1992, I met someone in 1997, we got married in 2002, my second marriage and his third, both in our mid-to-late 60s.

Never say never again, again!

jimmy230

martinm wrote: »

Sorry to jump back to my posts on page 11 but I have all the money side of Mum's estate on paper now so it is form filling in time. Looks like I will have need to send for copies of her birth and marriage certificates along with my fathers.... looks like I need to fill in IHT200 and IHT216 ?? but the latter says you have 24 month to fill it in but only 6 month for IHT200?

Also, just in case, what happens if your going to be late with IHT200 ?

Thanks

Martin

If you are late with the IHT200 HMRC can impose financial penalties. If you think you may be late for some reason, I would strongly recommend you write to HMRC to ask for extra time. Bear in mind that you can provide estimated figures on the form and you can delcare to HMRC any amendments later, e.g. if you discover a shareholding that you didn't know about. It is therefore better to get the form in early!

You are given 24 months for the IHT216 (the form to claim the unused portion of a deceased spouse's nil rate band) as it may take time to locate some of the documents required. You will need the marriage certificate, death certificate and grant of probate (and any subsequent deed of variation) of the first deceased spouse). Where the first spouse died after 07 October 2007, you will also need their IHT200 / 205.

martinm_2

Thanks jimmy230, I have just printed the IHT200 help notes!

I am sorry to have to ask but the IHT216 is the form that gets me the 2x£300k so if I just send in the IHT200 in the 6 month time limit, 31st Aug for me, I would have to pay a lot more, ie on just £300k and clam it back later when IHT216 is sent in?

Martin

jimmy230

martinm wrote: »

Thanks jimmy230, I have just printed the IHT200 help notes!

I am sorry to have to ask but the IHT216 is the form that gets me the 2x£300k so if I just send in the IHT200 in the 6 month time limit, 31st Aug for me, I would have to pay a lot more, ie on just £300k and clam it back later when IHT216 is sent in?

Martin

On the IHT200 in box J2 you should give the value of the combined nil rate bands and advise HMRC that you will be submitting form IHT216 shortly.

In terms of the unused nil rate band of the first spouse you can claim the percentage of their unused nil rate band (100% if everything went to their spouse). The applicable nil rate band is that available on the death of the second spouse, i.e. £300k for tax year 2007/08 and £312k from 06 April 2008.

I hope this makes sense.

silentotter

Does anyone know if the changes to the inheritance tax announced in the budget are actually goung to be made law or not? I hear much about it possibily being made law this month or next month but have seen no report in the press and there is nothing on the HMRC website other then ammendments to be published in the IHT handbook.

The bank that is dealing with my mothers probate has applied for probate under the new rule, 2 x unused IHT allowance, but informed me that they will have to earmark over £70,000 of my inheritace just incase the changes don't become law and inheritance tax becomes payable?

Would anyone care to explain to me how that works? sounds like they withhold funds from you only to have to repay it?

Silentotter

sloughflint

silentotter wrote: »

Does anyone know if the changes to the inheritance tax announced in the budget are actually goung to be made law or not? I hear much about it possibily being made law this month or next month but have seen no report in the press and there is nothing on the HMRC website other then ammendments to be published in the IHT handbook.

The bank that is dealing with my mothers probate has applied for probate under the new rule, 2 x unused IHT allowance, but informed me that they will have to earmark over £70,000 of my inheritace just incase the changes don't become law and inheritance tax becomes payable?

Would anyone care to explain to me how that works? sounds like they withhold funds from you only to have to repay it?

Silentotter

Royal Assent granted today apparently.
Scroll down to Finance Bill
http://services.parliament.uk/bills/

(Addition.) Too late for you silentotter, but I believe banks are VERY expensive when dealing with estate matters.