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

holly_hobby

Hi,

Yes they could gift the property to you/spouse whilst paying FULL market rent, which although would still be subject to PET regs, would take it out of GWR waters.

However for this to be succesful, the tenancy must be operated with reviews, the responsibility of costs, maintenance etc must be managed as under a traditional landlord/tenant relationship .... ie for all intents and purposes Mum & Dads tenancy is treated no differently than if you had let the property to a complete stranger, for this to have the most tax advantages to all.

Don't forget you must also delcare your net rental income for tax purposes via annual SA, and if the dwelling is not your primary residence on sale, you will of course be exposed to CGT on any gain on disposal (less permitted reliefs, allowances and exemptions that may apply) .

Accordingly beware ... if at any time parents pay less than full market rent for their residency, they will be exposed to POAT (pre owned asset tax) regs - which is applied by an increase to the Donors income tax liability. So do be mindful of this.

As HNW clients, I would really hope parents would top and tail any plans they/you have with a tax practioner, or even HMRC directly, before you make any far reaching changes.

Hope this helps get the ball rolling.

Holly

feelingsuelawley

Thanks Holly.

Had been reading up on the transfer of the property - the issues you raise on rent, L+T and income tax are some of the complexities I allude to.

I guess the only other "positive" is that by paying rent, it would further reduce their cash capital (hence moving even further below the threshold) but at the expense of Schedule A taxation to me/my spouse.

What I'm not clear on is the impact this has on their ability to pay for care, should their health deteriorate (both are well and fully independent now). The house would be an asset to allow them to afford care if needed, while they owned it.

I think the bottom line is that there's not much left to do beyond PET and hope to time expire it (or hope the property/investment markets dip at the right moment).

(Or celebrate success in their investments and accept that IHT exposure is the consequence of this)

Unless anyone can spot opportunities, based on this level of information!

holly_hobby

If you manage the "let" as planned, then it will be excluded from any LA MT for state assisted long term care (if no evidence that the exercise was to deprive).

You may however wish to put to one side the rent they will be paying you, to fund any future assistance need, which would be an appropriate compromise I feel.

Yes you will be exposed to tax on rental income, but I am guessing this will be way lower than any IHT exposure, so a small price I feel in the greater scheme of mitigating the IHT exposure you currently seek.

With regards to ownership, if you are married and one of you are a higher tax payer than the other, you may wish to own the property under a Tenants In Common arrangement, which means that you weight the % of ownership to that of the lower tax payer, and declare the split of rental income in the identical % under each of your returns, with obv the lower tax payer being in receipt of most of the rental income, and it duly exposed to a lower rate of tax. This is reported to HMRC via Form 17.

Joint ownership will also mean 2 x CGT allowances, and if planned correctly will mitigate any 28% exposure.

Hope this helps

Holly

feelingsuelawley

Thanks again.

I think we may be able to disregard the CGT aspect.

The favoured option would be that we eventually move back to that house (my childhood home), selling our current property as primary residence.

Fallback scenario is that we rent parents' house until we can move.

John_Pierpoint

I am fully aware of the risks of creating airy fairy work shy "trusterfarians", but have you considered the possibility of some of the wealth being earmarked for the grandchildren, to at least use up some of their (soon to be) 10,000 annual income tax allowances?

feelingsuelawley

John - yes, we have.

I had understood that, in terms of my parents' ability to do such a thing, the money either has to come out of their (parents') "excess income" or "Tax free gift" or PET headings. Am I correct?

ie, there is no magical other way of getting the money out of my parents' estate without troubling HMRC, just because it's going to a trust for their grand children, rather than to my bank account (or my child's bank account)?

And, does the same apply to contributions to Child Tax Funds, or Junior ISAs etc?

zygurat789

holly_hobby wrote: »

If you manage the "let" as planned, then it will be excluded from any LA MT for state assisted long term care (if no evidence that the exercise was to deprive).

You may however wish to put to one side the rent they will be paying you, to fund any future assistance need, which would be an appropriate compromise I feel.

Yes you will be exposed to tax on rental income, but I am guessing this will be way lower than any IHT exposure, so a small price I feel in the greater scheme of mitigating the IHT exposure you currently seek.

With regards to ownership, if you are married and one of you are a higher tax payer than the other, you may wish to own the property under a Tenants In Common arrangement, which means that you weight the % of ownership to that of the lower tax payer, and declare the split of rental income in the identical % under each of your returns, with obv the lower tax payer being in receipt of most of the rental income, and it duly exposed to a lower rate of tax. This is reported to HMRC via Form 17.

Joint ownership will also mean 2 x CGT allowances, and if planned correctly will mitigate any 28% exposure.

Hope this helps

Holly

The house could be transferred to the wife and 4 children, then soon to be £50K of rent will be tax free and if therec ever was a CGT liability then there are 5 X exempt amount.
But then children don't always turn out as we expect.

feelingsuelawley

We are looking at re-evaluating their "excess income" to see if we can increase money transferred in this way.

Is anyone able to advise whether it is possible to use this calculation to transfer a large sum of accumulated "excess income"?

For example:
Income of £50K/yr
Living expenses of £20K/yr
= Excess income of £30K/yr

Could this be legitimately used to transfer £90K as 3 years of accumulated excess income (so long as the calculation genuinely demonstrates that excess existed over the period)?

I understand there was caselaw on this, but I don't know if it has subsequently been overruled.

getmore4less

Gifts from income have to meet some very strict criteria.

Have a good read of HMRC site

http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM14231.htm

This exemption applies where the taxpayer can show that a gift (transfer of value) meets all three of the following conditions:

• It formed part of the transferor’s normal expenditure (IHTM14241),
• It was made out of income (IHTM14250), and
• It left the transferor with enough income for them to maintain their normal standard of living (IHTM14251).

Acc72

Hello All,

I am looking for advice on IHT planning.

Does anybody know of a person/firm based in the North West / Greater Manchester who they would recommend ?

Many thanks.