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

dalboy

margaretclare wrote: »

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

Oh, so anything over 650k in that case will be taxable.

And I currently do live with them!

NW123

My father died 10 years ago and left the house to my mother. He had no other assets or finance just the house that is owned outright. The house is worth in the region of £450,000. I am an only child and the house is due to be left to me on the death of my mother.Would I be liable to pay inheritance tax?

harryhound

Assuming you dad did not use up his nil rate band by leaving wealth to people other than his spouse; then your mum has two nil rate bands available at her death.

Assuming current tax rules continue, the parents were legally married and the nil rate band stays the same that would be 2 time 325K. So the answer, provided you mother does not have other substantial wealth, is "No-your mum's total estate would have to be greater than 650K before the currently 40% rate starts".

If the value of the estate is greater than the nil rate band (325K) you have to be able to prove all the above "If's" so make sure you keep dad's paperwork somewhere safe, or be prepared to reconstruct events from his letters of administration/probate (aka "admon").

KAMH

Hi James,
Haven't been on this site for a while so have only just seen your reply. Unfortunately, you were wrong, as I have now discovered. My husband passed away in 2004 so it is too late to do anything about keeping the money myself and then forming a trust for my son - although the probate situation STILL hasn't finished due to incompetent and negligent solicitors and executors! I have discovered now that the £600k gift to our son was taxed as minus the IHT allowance but then 'grossed up' because the gift was to be tax free so that tax is also taxed (because the tax on a gift free of tax is also considered a gift). The result is a bill of close to 65% instead of the 40% expected. If anyone reads this who is thinking of leaving tax free gifts to people, please realise that they are not taxed at 40% as we imagine. Even the solicitor thought this was the case as evidenced by the way she completed the IHT200 but the tax man corrected the error and then took a further £37k in interest for late payment. There was a further gift of £190k which had been put in trust but the tax man refused to allow the trust, so levied a total bill for the gifts of almost £415k. If my husband had only been aware of this and had better advice he would have done things very differently. Don't trust solicitors people, you NEED to get advice from a GOOD tax accountant!
Sorry for the rant but my husband's legacy has been decimated and I am understandably miffed!

John_Pierpoint

KAMH wrote: »

Hey clever people, please answer a question for me.
If someone dies leaving an estate of, say, £1.2m and the will states that £600k should go in trust for the child and the residuary to the surviving spouse, would the tax only be payable on £600k less the current exempt amount as the residuary is tax free? Would it make a difference if the couple were amicably living apart but did not divorce for tax reasons? I think I must have got it wrong because an extraordinary amount of tax seems to have been paid and I totally don't understand all the schedules etc that the solicitor has filled in. I'd like to get help but am scared stiff of getting yet another enormous bill for finding out that everything has been done as it should have been!
Hope to hear from someone.

James_Trimby wrote: »

Hi KAMH for IHT separation is ignored so for IHT still married and subject to the exemptions Therefore if we are talking about 2008/9 tax year I would expect tax bill to be £600,000 less £312,000 exemption = £288,000 * 40% = £115,200 or thereabouts. IF divorced tax bill would be on the lot ie about £355k. They do also have to look into gifts to non spouse in last 7 years before death, which could up the tax bill.



IF there is alot of family "trust" in this situation might be worth looking at a deed of family arrangement leaving all to surviving spouse. And for her/him to then set up a trust for the child for the £600k. WOuld avoid an immediate charge. The surviving spouse would get a double exemption on death and the £600k could be exempt if surviving spouse lives 7 years plus. This would need the trustees consent which might be v difficult for them to give as turning down monies doesnt seem logical (and they cannot place a condition on survivor to do the new trust) need legal help on this as I'm only an accountant!

YOu have given very brief details for a large estate so please take above with pinch of salt but hopefully this helps?

For those. like me who did not quite understand the previous post.

http://www.hmrc.gov.uk/rates/iht-thresholds.htm
6 April 2003 5 April 2004 £255,000
6 April 2004 5 April 2005 £263,000

[Now I don't understand "grossing up" of the the "tax free" gifts any better than the original poster and her (husband's) solicitor, does anyone think they can do the calculation and explain it?
Let us pretend that the nil rate band was 255K and the "gifts" were 600K for the son's trust and 190K to A.N.Other.]

So that is 600 + 190 - 255 = 535K that has to be grossed up to pay its "fair" rate of tax, so that afterwards there is still 790K left afterwards for the two legacies? The theory being that the tax man gets his money first so you cannot give away the "taxpayers" (aka voters' bribe/bankers' bailout/MP's expenses/war fund) legacy.
However clever your tax adviser might think he is?

Should we pretend the pre tax net value of the estate was 1390K.

John

PS Feeling depressed? Have a read of this thread:

http://forums.moneysavingexpert.com/showthread.html?t=1120993

KAMH

Hey John_Pierpoint,
I have read and re-read your message and am rather flummoxed. I'm not sure what you are trying to say and wonder why you should say "should we pretend the pre tax net value of the estate was 1390k". Where did that figure come from?
Not many people seem to understand the grossing up situation but there is a grossing up calculator on the HMRC or directgov website that does it for you if you put in the correct figures.
My objection is that when a man works very hard, all his life, then dies and leaves his all to his wife and son, that the legacy to the son should be taxed at 65% - which is what it works out at after the grossing up - when the man has already paid higher rate tax on his income as a company director - not any of the other things you mentioned.
Were you being nasty?

John_Pierpoint

I added the 190K extra trust to the original estimate of the value of the estate. So 1200K + 190K = 1390K ?
I think it is the tax system that is being nasty, I'm just struggling to understand the figures.

Thanks for the pointer to the grossing calculator - I'm currently trying to use rusty schoolboy algebra to understand.
(I've also corrected the typo error I made last night, when the "hole" one is typing into is smaller than the posted result).

John_Pierpoint

Here is my maths - I've never done it before so any corrections would be welcomed.

600,000 + Bequest given free of tax
190 000 +. " " " " "
790 000 = Total of tax free bequests
255,555 - Nil rate band at date of death
535,000 = But his was "x" before it paid IHT (you cannot dodge GB by not inviting him to the wake)

535,000 = x - 0.4x
535,000 = 0.6x
891,666 = x (Is this where you got the 60% from?)
356,666 = tax payable

1,390,000 = gross estate

891,666 - grossed value of taxable bequest to trusts.
255,000 - Tax free bit given to trusts.
1,146,666 - Amount set aside for trusts and tax.

243,334 - Tax free amount as residuary belongs to wife (but we have not paid any expenses yet?).

1,390,000 = Gross value of estate
243,334 - tax free residuary to wife
1,146,666 = taxable estate
255,000 - nil rate band
891,666 = amount subject to 40% tax
356,666 = tax

Distribution
600,000 in trust for son.
190,000 A N Other's trust
243,334 To wife to pay expenses

HMRC have a calculator for interest on tax paid late, but it seems to be on strike at this time of night
so her is a guess:
356,666 compounds up at (say 3.5% PA) at about 14K per year after the interest free first 6 months following the death, so that is an extra 70K to find after 5 years.

How much have "the legals" come to ?

How old is your son?

What sort of trusts have been created?

In fairness to your late husband, what effect did Gordon Brown's "reform" of trust taxation in 2006 have on the trusts your husband created?
(The trust beneficiary (son & A N Other) might have some more nasty surprises when they get their annual accounts especially after 10 years or when the trust gets wound up).

If this comes across as nasty and clinical, I don't mean it to be - I have lived with a similar situation since I was just 21 - I now have a bus pass.
I am the personal representative of the estates of
Father
Grandmother
Great Aunt
Mother
Uncle

Great aunt and mother and at last father are now history but there is still a thread of activity in the other two.

How liquid is the situation?

When I was 21 and my father died there were assets and debts and great aunt had an old age state pension. The only other person with an income was me on a trainee salary of £750 a year.

Life style adjustments were the order of the day.

My grandmother's trust fund, which had devolved to my teenage sister and me, did a swap - it paid off the debts and taxes and ended up with a claim on a big chunk of our mother's house. A non income taxable, non income producing asset. That seemed preferable to the three of us ending up on the street:D
Nor did we pack off our widowed mother to the "Dower House"; though we did have our moments.

NeedHelp_3

Hi My parents have a house worth approx 1mil. They both had will with house owned as tennants in common. On first death nil rate band was was planned to put into trust for my brother and I and rest passed to spouse.

My father passed away go 325K has been put into trust and deeds are due to be changed at land registry as owned by trust.

My mother now has an estate of apprx 700K. Which when she passes away would be 150K. Which I want to minimise. Some questions I have are below:

1. My solicitor has said we can put the % of house owned on deeds as 325K now will be higher % in future ie approx 1/3 or property is owned by trust. Is this correct. So if house went up to 1.5 mil trust would own approx 500K ?

2. We want to try and minimise the IHT tax bill on the 700K. Suggestions

a) Convert the house to be able to be used as 2 flats. She remains in one flat. She gifts the flat to us and hope 7 year rule apply or we take out a term assurance fr the 7 years to cover if she passes away during that period to pay IHT. Cheaper than whole of life policy as she would not get one due to her age and health. Obviously we have some conversion costs and deed changes etc. Mum was not so keen

b) He has suggested she goes with an equity release and releases 400K which she retains some money but gifts the rest to us. Again take out term assurance to cover 7 years. On death her estate would not only be 700K - 400K and within threshhold so no IHT. We would then be required to pay the equity release company back + interest. Term assurance about £200 per month which is about 18K for 7 years
Question I have is when mum takes equity release can we just pay interest as well like a regular mortgage ? On death can my brother and I just pay the 400K back and own the house.
So in total we would pay interest on equity release (not sure on how much this would be) + term assurance costs. Hopefully coming below the £150K

Ultimately we want to own the house as I promised my dad I would not sell it. Not sure what is best to do ? Any advise would be good

Red_Eye_2

Hello, recently my father passed away & we are sorting out his estate. My mother & father lived together but were not married. The house is in my fathers name but just under 3yrs ago he added my mother onto the deeds & made her a tenent in common, also he did a basic will where I inherit half the house & my mother gets the other half + all contents & wealth.

My question is, Do I only have to pay IHT on my half of the estate (approx £500k) in which case where does that leave my mother, who wants to stay in the house at all costs. What sort of cost will my mother have to pay on her side of the IHT?

Can she sign her half of the estate over to me (based on the 7yr rule) to avoid paying any more IHT in the future when she dies.

If I was to inherit half the house, where do I stand regarding tax on 2 properties?

All we want to do is avoid paying as much IHT as poss, due to the fact that we've paid tax all through our working lives !!

Thanks