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

John_Pierpoint

If it was was cash and it remained cash then no capital gain has occurred, so there is no gain to be taxed. (*)
However are you confusing CGT with IHT ?
The latter is a 40% levy on the deceased's net wealth at the date of death after accounting for the "exempt" or nil rate band, which for the second to die of a couple can be as much as 650,000.
This figure of net wealth includes everything (except for the costs of the disposal of the body, a memorial and the wake) Everything includes the total of gifts (but see the 3,000 annual exemptions and a few other concessions such as marriage gifts) up to 325,000/650,000 given away in the last 7 years. [Some graduated relief is available for even larger gifts.]
It also includes things like dividends declared but not yet paid.

I think you need to have good advice on hand, because you will almost certainly find some more "funnies" before you have finished with the probate, in say a years time:

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(*) However the government has a policy of imposing taxation by inflation of at least 2% a year (stealing half the value in 36 years), so if something real was bought with the money, then a "Capital Gain" can be highly likely.

If there are any capital gains accrued in the assets of the estate owned at death they are extinguished and replaced by IHT if any. However if they were given away or sold prior to death, then there could be a double wammy. There could be capital gains tax to pay as well.

hamski

Thanks for all of your advice John its much appreciated , a year :eek: I was hoping it would take less than 6 months.

John_Pierpoint

It depends if everything is in apple pie order.
It is like buying a new home, don't smash up the garden before leaving it a year to see what come up. The tax man would want his share within 6 months and the beneficiaries are entitled to interest after 12 months (ie if left say £10,000 after 18 months the payment should be £10k plus 6 months interest).

Don't forget you have to account for any interest, rents, dividends earned during the period of administration and give each beneficiary a R185 tax deducted certificate.

slambos

My mother(in her early seventies) and I have just begun to talk about the potentialpitfalls and I’d like some advice please.

Here’s thescenario as best as I can describe it:

I’m an onlychild, she is single (my father passed away some years ago however they werelong divorced anyway).

Property shelives in in London and owns outright (mortgage was paid off when she retired)is valued at approx. £360,000.

Her car isworth approx.. £2,000

Lifeinsurance/other policies including teacher’s pension pay-out will be a fewthousand £s

So totalvalue of her estate (which will come to me unless I pass away first) will bearound £365,000 meaning there will be some inheritance tax to pay. Obviously,we would like to reduce the amount of tax payable.

My questionsare:

if my motherdownsizes and moves into a place valued at say £275,000 and gifts me the profitof approx. £85,000 (to help me get onto the property ladder) how do we do thisin the most tax effective way?

If my motherdoes not downsize but rather signs over the property to me and continues tolive in it until her passing is this a sensible thing to do? Some havesuggested this as a good option (providing my mother lives for 7 or more yearsafter the gift is given).

Any helpwill be much appreciated. Thanks

Mojisola

slambos wrote: »

Lifeinsurance/other policies including teacher’s pension pay-out will be a fewthousand £s

She should be able to arrange these so that they pay out directly to you and don't become part of her estate.

if my motherdownsizes and moves into a place valued at say £275,000 and gifts me the profitof approx. £85,000 (to help me get onto the property ladder) how do we do thisin the most tax effective way?

There's no gift tax so nothing to pay initially. If she survives for 7 years, there won't be any IHT to pay.

If my motherdoes not downsize but rather signs over the property to me and continues tolive in it until her passing is this a sensible thing to do? Some havesuggested this as a good option (providing my mother lives for 7 or more yearsafter the gift is given).

Google "gift with reservation".

Any helpwill be much appreciated. Thanks

As your mother will have a property that can be sold to fund residential care should she ever need it, there shouldn't be a deprivation of capital issue.

I'm not sure about DOC if she needs care at home.

holly_hobby

slambos wrote: »

Lifeinsurance/other policies including teacher’s pension pay-out will be a fewthousand £s

Is pension currently in payment ? Also just to be aware Pension payout may be subject to tax - verify the basis of the payment with the scheme provider to ascertain the tax implications. This may help guide ... http://www.pensionsadvisoryservice.org.uk/personal-and-stakeholder-pensions/stakeholder-pension-schemes/death-benefits

Also, have the existing term assurance/life policies placed under trust (which excludes them from the estate) - contact the providers for free forms for completion.

slambos wrote: »

So totalvalue of her estate (which will come to me unless I pass away first) will bearound £365,000 meaning there will be some inheritance tax to pay. Obviously,we would like to reduce the amount of tax payable.

slambos wrote: »

My questionsare:

if my motherdownsizes and moves into a place valued at say £275,000 and gifts me the profitof approx. £85,000 (to help me get onto the property ladder) how do we do thisin the most tax effective way?

As stated by Maj. there is no gift tax as such, but as a PET the sum (net of 1 x 3k permitted annual gift allowance) may be exposed to IHT if the donor dies within 7 yrs of donation - after which time the gift will be excluded from the estate completely.

Also, should she or her representatives seek any means tested benefits, including any application for long term care assistance, and it is reasonable she knew she would seek this assistance (after equity release exercise) but before donation, then the gift will be cited as deprevation of assets (in that she deliberately deprived herself of this availalbe capital), and as such the sum will be treated as remaining in her estate for evaluation purposes. (which may or may not be an issue given her other financial status).

slambos wrote: »

If my mother does not downsize but rather signs over the property to me and continues to live in it until her passing is this a sensible thing to do? Some havesuggested this as a good option (providing my mother lives for 7 or more yearsafter the gift is given).

No this is incorrect , because this would make it a gift with reservation, in that she has retained full use and benefit of it after donation, as such it will be excluded from PET regs and will fully remain within her estate valuation (or at least until she does move out of it, at which point the PET clock will commence its 7 yr count down).

Hope this helps

Holly x

kidmugsy

There are special IHT provisions for the case where you share her house. As she gets older, is that a possibility? Otherwise I'd suggest you leave the house alone and just take the IHT charge on it on the chin. Try to minimise the IHT on everything else, as commenters here have recommended.

John_Pierpoint

holly_hobby wrote: »

As stated by Maj. there is no gift tax as such, but as a PET the sum (net of 1 x 3k permitted annual gift allowance) may be exposed to IHT if the donor dies within 7 yrs of donation - after which time the gift will be excluded from the estate completely.

Also, should she or her representatives seek any means tested benefits, including any application for long term care assistance, and it is reasonable she knew she would seek this assistance (after equity release exercise) but before donation, then the gift will be cited as deprivation of assets (in that she deliberately deprived herself of this available capital), and as such the sum will be treated as remaining in her estate for evaluation purposes. (which may or may not be an issue given her other financial status).

Just one small pedantic point, when making the annual £3k exempt from potential IHT gift, am I right in thinking that £6k can be make in the year the gifts start? [Edit: Yes an unused part of the £3k annual allowance can be carried forward for up to 12 months.]

Mum is allowed to make gifts from spare income (as against capital) but I doubt she has got much of that. [In my family I once had a situation where both donor and recipient died at much the same time. and one party appeared to have been paying the other's weekly supermarket shop. The tax man big heartedly said - "don't bother about that, it is just some private family arrangement".]

The original poster sounds "young" to have a mum in her 70s so her/his age probably won't come into the equation.

Can we assume that she/he has no legal partner and there are no grandchildren and the estate is in England & Wales.

For a single child, there is about a 1/3 chance that caring for "frail" mum for (say) 4 years, will become an issue. Perhaps now is the time to discuss options with mum while she is relatively flexible and compos mentis - in the final analysis its mum's wealth but her child will be making the decisions.

Institutional & home care gets very expensive (the latter especially in hot spots for wealthy home owners such as London & the South Coast and unlike IHT is difficult to pre-plan. The government has published care cost proposals but a deficit government in a deficit country won't be giving away anything soon - increasing the IHT allowance of £325k, originally intended to increase annually, looks like it is frozen until well after the next election.

Government bodies owed monies, are likely to secure their position by putting "a legal charge" on the real estate (while rolling up interest) rather than demand cash on the nail from someone with cash flow limitations. Payment by instalments is allowed when real estate is involved. [Our family home carried one such charge negligently for 35 years, long after the IHT had been settled]

Time for will writing and power of attorney ?

holly_hobby

John_Pierpoint wrote: »

Just one small pedantic point, when making the annual £3k exempt from potential IHT gift, am I right in thinking that £6k can be make in the year the gifts start?

Yes, you can carry forward 1 year of unused annual gift allowance - equating to a possible 6k (12k for a couple), in any one instance.

I should have included that in the orig post ... apols.

John_Pierpoint wrote: »

Time for will writing and power of attorney ?

Given the individuals age, it would an LPA rather than a striaght POA, that would be recommended.

Hope this helps

Holly

feelingsuelawley

My parents are both in their 70s and have recently valued their estate at c£1m (£450K house they live in as Tenants in Common, owned outright) + remainder in investments, bank accounts, various chattels (car, furniture, etc but nothing out of the ordinary).

I am their only child. My spouse does not have an income/pay income tax. I am a 40% tax payer. We have 4 children of school age. Between me, my spouse and our children, we are the sole beneficiaries of both wills.

Their wills are currently written based on the premise that the Nil Rate Band would rise over time: gifts of c£100K on first death, leaving c70% of the NRB to transfer to second death.
The assumption was that, come 2nd death, the NRB would have increased to a level where more of the remaining estate was exempt from IHT, perhaps even all of it.
That no longer appears a safe assumption, so they are re-planning. (Not because of specific ill-health or concerns about their longevity, it's just their sense of the prevailing trend of the NRB, beyond the current firm statements to 2018)

At present, by my rough calculation, they'd be about £400K over the combined NRB, hence c£160K of IHT. Clearly they would like to reduce this.

They have been making use of Tax Free Gifts to £3K each, per year to me and will continue to do so.
They have made various PETs in the past and would consider doing so again.
They make some use of gifts from income, both to me and paying into accounts for my 4 children (their only grandchildren).

They are changing some of their investments to stop re-investing the income and start to draw this down. This would stop further capital appreciation and, potentially, give more income which could be passed on. However, this won't clear the whole IHT liability on its own.

The only other options which occur to me at this stage are:
1. Making a sizeable cash PET as soon as possible and hoping it time expires 7 years. However, this would need to be a significant proportion of their non-property assets to take the estate out of IHT and I'm not sure that is practical.
2. Doing something with their house, either:
a. giving all/some of it to me/my spouse as a PET and paying market rent (which would be taxable).
b. passing it to me on 1st death (presumably leaving the survivor paying 50% market rent) to mitigate the impact of further appreciation of the asset to the 2nd death estate.

Obviously, we have no desire to impact on the quality of their lives/ability to afford care - or their ability to continue to treat their children/grandchildren to occasional favours!

The options I've identified around gifting their house (either as a PET or on 1st death) feel complex and potentially more troublesome than they're worth. Am I dismissing them too quickly, or is the cash PET simpler and just as effective?

Other than these, are there any other viable options to consider?