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

cecilia_clementine

RobS77 wrote: »

Yup- thats what we do with our clients. You do a deed appointing the income to the beneficiary, or beneficiaries, in question- our accounts guys have never had any problems.

By granting a revocable life interest to income in whatever terms you want, you effectively grant a right to income to the lower rate tax payer for as long as the interest lasts for: most accountants don't do alot of trust work. Who does he work for? You need to get advised by someone who specialises in the field.

Hi RobS77,

The accountant works for Pricewaterhouse Coopers.

I have double checked with the trusts people at HMRC and they stated quite categorically that the beneficiaries of an interest in possession trust can receive their income directly (at their lower rate) but that does not apply to discretionary trusts - that has to go through the trust and reclaimed.

They referred me to this link:

http://www.hmrc.gov.uk/trusts/beneficiaries-pay-reclaim.htm

An excerpt of which states:

'Trustees of interest in possession trusts can ‘mandate’ income to you, which means that the income (for example dividends from shares or interest from a bank account) goes directly to you, not through the trustees...'

It seems the accountant was right, after all. Many thanks for your help.

JWHAIL

I wonder if anybody can help with this please.
A young lady in our office is being faced with an awful situation due to IHT. Her father sadly passed away recently, he left her a house worth approximately £800,000 & £82,000 in cash. The father had a girlfriend who loved his house & a 10 year rent free lease was granted to her in the will for her to continue using the property. The problem is the IHT situation, the 20 year old young lady is now faced with an IHT bill for £222,800 & has absolutely no way of paying it.
The young lady is absolutely beside herself with worry & is facing bankruptcy. Is their nothing that can be done in this situation, it seems insane to me.

Any help / advice work be fantastic.

jezster

Hello,
I am in a quandary, my father gave me my inheritance early, so that I could use it as a deposit for my house. He told me he was not over the IHT level when he gave it me, this was two years ago & now he is worried he may have left me in a position of having to pay tax if he dies.
Please could anyone enlighten me.
Thank You

MJD

jezster wrote: »

Hello,
I am in a quandary, my father gave me my inheritance early, so that I could use it as a deposit for my house. He told me he was not over the IHT level when he gave it me, this was two years ago & now he is worried he may have left me in a position of having to pay tax if he dies.
Please could anyone enlighten me.
Thank You

I am no expert on these things but the following may be of interest to you - in particular to your situation I think that the 'Seven Year Rule - potentially exempt transfer' may apply -

The seven-year rule - 'potentially exempt transfers'

Any gifts you make to individuals will be exempt from Inheritance Tax as long as you live for seven years after making the gift. These sorts of gifts are known as 'potentially exempt transfers'.
However if you give an asset away at any time, but keep an interest in it - for example you give your house away but continue to live in it rent-free - this gift will not be a potentially exempt transfer. Follow the link below to find out more.
If you die within seven years and the total value of gifts you made is less than the Inheritance Tax threshold, then the value of the gifts is added to your estate and any tax due is paid out of the estate.
However, if you die within seven years of making a gift and the gift is valued at more than the Inheritance Tax threshold, Inheritance Tax will need to be paid on its value, either by the person receiving the gift or by the representatives of the estate.
If you die between three and seven years after making a gift, and the total value of gifts that you made is over the threshold, any Inheritance Tax due on the gift is reduced on a sliding scale. This is known as 'Taper Relief'.

Have a look at the page that I have taken this from for more information

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/InheritanceTaxEstatesAndTrusts/DG_179336

In essence I believe that your father has to survive another five years for the total amount of your early inheritance to be IHT free - should he pass before the seven years are up and you decide to tell the revenue about the gift he gave to you then IHT is, i believe, payable on the sliding scale known as taper relief

There is also a link on the above page to the Taper Relief amounts.

I hope that helps and may alleviate some of your father's fears.

John_Pierpoint

JWHAIL wrote: »

I wonder if anybody can help with this please.
A young lady in our office is being faced with an awful situation due to IHT. Her father sadly passed away recently, he left her a house worth approximately £800,000 & £82,000 in cash. The father had a girlfriend who loved his house & a 10 year rent free lease was granted to her in the will for her to continue using the property. The problem is the IHT situation, the 20 year old young lady is now faced with an IHT bill for £222,800 & has absolutely no way of paying it.
The young lady is absolutely beside herself with worry & is facing bankruptcy. Is their nothing that can be done in this situation, it seems insane to me.

Any help / advice work be fantastic.

How old is dad's girlfriend?
Does the will create the 10 years of zero rent occupation, or had the father done this before he died?

I would think that a mortgage could be raised to pay the IHT, which itself is payable over a number of years.

If course there is a risk that in 10 years time, the IHT and the accrued interest on the mortgage might mean that (say) half of the value of the house has been dissipated.
(Rule of 72: divide 72 by the rate of interest and that gives an approximation of the time it takes for half of the value to have be used up. Ie a roll up mortgage of 7% ish would have used up half its capital in 10 years so very roughly one would need to borrow 444k to pay the interest on the debt and pay off the IHT of 222K.)

http://www.hmrc.gov.uk/rates/iht-interest-rates.htm

There is a danger that the tax man might argue that a lease for a zero return is a fiction just designed to mess with the tax system. Were girlfriend to die in the next 10 years perhaps the tax man would claim that she had been given a life interest by an "interest in possession" trust and so demand a second slug of IHT?

With this much money at stake good professional advice is needed.

dalboy

Hi

Didnt know whether I should start my own thread or not.

OK well my parents (married) have a house (mortgage now paid) which is valued around £310,000

My parents who are in their 60's want to leave the house for my sister and I, and we are worried about IHT. I know IHT kicks in only over 325k.

What is the best way to reduce / avoid IHT in this pretty straight forward scenario? Can a certain worded will avoid IHT?

Any help appreciated.

harryhound

You have 382 other entries to read.
There is very little your parents can do, if they want to continue to live in the house.
They could give it away and then pay a full market rent to the new owners (ie the two children) but the tax man would have his share of Income Tax and then Capital Gains Tax, from the new owners if they did. For the first 7 years of such an arrangement the family would be in double jeopardy, in that were they to die Inheritance Tax (on a sliding scale) would be added to those two taxes.
How much other wealth do they have to survive for the rest of their lives?
There is one chance in 5 and one chance in 3 that a male or a female will require residential care.

There are only two observations to make: If they already have a will leaving half the house to the kids on the first death, this is probably not a good idea, as the unused percentage of the nil rate rate band can now be transferred to the surviving spouse; giving 200% of the nil rate band on the second death if nothing is given to others on the first death. Ot also might be a poor idea to leave the clause that says "I leave ........ to my spouse provided he/she survives me by 30 days........." because that might not happen.
If the half of the house is left to the survivor as a life interest, that will protect it from being used for nursing home fees BUT the widow might not like that arrangemnt (well it usually is the widow).

dalboy

harryhound wrote: »

You have 382 other entries to read.
There is very little your parents can do, if they want to continue to live in the house.
They could give it away and then pay a full market rent to the new owners (ie the two children) but the tax man would have his share of Income Tax and then Capital Gains Tax, from the new owners if they did. For the first 7 years of such an arrangement the family would be in double jeopardy, in that were they to die Inheritance Tax (on a sliding scale) would be added to those two taxes.
How much other wealth do they have to survive for the rest of their lives?
There is one chance in 5 and one chance in 3 that a male or a female will require residential care.

There are only two observations to make: If they already have a will leaving half the house to the kids on the first death, this is probably not a good idea, as the unused percentage of the nil rate rate band can now be transferred to the surviving spouse; giving 200% of the nil rate band on the second death if nothing is given to others on the first death. Ot also might be a poor idea to leave the clause that says "I leave ........ to my spouse provided he/she survives me by 30 days........." because that might not happen.
If the half of the house is left to the survivor as a life interest, that will protect it from being used for nursing home fees BUT the widow might not like that arrangemnt (well it usually is the widow).

Their current will states that all the total wealth will go to the other spouse upon their death.

Can my parents not give, say, £100,000 value of the house to me? I guess that would just be too easy :P

harryhound

Yes but they would be required to pay you market rent on which you would pay income tax at your marginal rate and when you came to sell it you would have to pay capital gains tax (assuming it is not your principle private residence)
If they died in the first 7 years there would be Inheritance tax to pay as well.
Should they need to go an live in a care home (which can cost 30K per year) it could be argued that they had given away part of their home to avoid spending its value on paying for the care home; a legal charge would be put on the land certificate making it impossible to sell.
Had you been in this situation in the 1970's your proposal might have worked, but it does not work now.
They could go and live in a trailer home, but somehow I don't think they will be very keen on that idea.
You have not answered the question about how they are going to finance themselves for the next 20 years - I'm not that much in favour of subsidising them - perhaps they should go and live at your place?.

margaretclare

dalboy wrote: »

Hi

Didnt know whether I should start my own thread or not.

OK well my parents (married) have a house (mortgage now paid) which is valued around £310,000

My parents who are in their 60's want to leave the house for my sister and I, and we are worried about IHT. I know IHT kicks in only over 325k.

What is the best way to reduce / avoid IHT in this pretty straight forward scenario? Can a certain worded will avoid IHT?

Any help appreciated.

The first of your parents to die will bequeath his/her IHT threshold to the survivor. The second to die will therefore have an IHT threshold of £650K.

HTH