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

Bebebo

I would really appreciate some advice if people aren't too exhausted by newbies asking the same questions, I have tried to find the answer myself honest!

2 parents with 2 children and 'stuff' (savings, house, shares, pensions etc) worth over 1m. First parent dies leaving a bit to each child and grandchildren but majority to other parent.

Now, in order to pay the least IHT I would have thought ( with my limited knowledge) that the best way would be to give a sum to each child now and hope to live more than 7 years but even if not, taper relief would still see them paying less in IHT than not giving any now?

However, parent in question is quite money savvy (consults financial advisors etc) and has not broached this topic at all, is it possible that he has other arrangements in place that will work out more tax efficient than this?

Also, both children are quite income poor (albeit with capital tied up) if they wanted to get some money from the parent to buy a house and let it out for income, what would be the tax implications of this?

Thank you in advance

grey_gym_sock

i take it you know that, assuming the couple were married, there will be nearly £650k IHT exemption - i.e. that less the legacies in the 1st will to children and grandchildren.

note that pensions are outside the scope of IHT. an uncrystalized (i.e. not drawn) pension fund, providing the person dies before age 75, is not subject to tax at all. a crystalized pension, or any at age 75+, is subject to a 55% charge (instead of IHT).

i agree that gifts and living for 7 years are the simple way to minimize IHT. bearing in mind that there are problems with trying to give away a home you live in (the rules about "gifts with reservation").

tapering relief does not actually reduce IHT unless you give more than the applicable IHT exemption, because gifts initially reduce the exemption. only when the exemption is exceeded are further gifts taxed at a reduced rate using tapering.

1 alternative, and IMO completely rubbish, IHT "avoidance" scheme, which does exist, is where you pay a % of your assets as an insurance premium every year, in return for which the IHT bill will be settled when you die.

other strategies would involve putting assets into certain kinds of trusts. that would have to be done before (at least) the 2nd death, not just in the 2nd will.

the parents may perfectly deliberately not being doing anything to reduce IHT. (after all, some avoidance schemes have failed, and their beneficiaries will anyway keep £840k of the 1st £1m.)

unquoted or AIM shares can be exempt from IHT.

John_Pierpoint

Buy the Which? book Giving & Inheriting; it is a user-friendly guide to estate planning and tax liability.

Spend a weekend in a darkened room digesting it alongside this link
http://www.hmrc.gov.uk/trusts/intro/basics.htm

Pop back with any questions and we can try to debate them for you.

Shimla

I have a friend whose parents are divorced.

He has been gifted half the house to him by his mother (her share of the property) a couple of years ago. He also has his own flat which he bought himself and that is his primary residence. He comes in high end of the income bracket and pays top band of the tax. He also knows that when his mother passes away her mother’s share will be assessed for IHT purposes. But is not worried as his mother does not own any other major things ie her estate will be under the threshold of IHT nil band (including the half share of the house). In any case if his mother lives for another 5 years then her share of the house will not be counted towards IHT calculations.

Now his father wants to sell the house ie he wants half of his share from sale of the house. House could be worth £375,000 in today’s value (so my friend’s share could be worth £187,000 depending on the sale price).

My friend knows that he has to pay Capital Gains tax on the share of the house gifted to him by his mother. But he is unsure how it will be worked out.

1. Does he have to pay CGT on the value of the whole share of the house? Or is it the difference of the value of his share when it was given to him and the value today?

2. Also will the money from the sale of the house be counted as his income for tax purposes and taxed as income as well as CGT.

Thanks in advance.

Shimla

John_Pierpoint

Let us clear up point 2: As far as HMRC is concerned capital is capital and income is what capital earns (by hiring itself out to people with insufficient capital or wanting to gear up the performance of their own capital.) So the capital gains tax (CGT), probably nil on the first £10,900 of gain since receiving the gift and then 28% for a higher rate income tax payer on any excess; is the tax payable.
Obviously if the money is re-invested in an asset that produces an income, then Income Tax will be payable on this yield; regardless of the fact that it probably won't even cover the ravages of inflation.

Now point 1: Who is living in this house ?

holly_hobby

Shimla wrote: »

Now his father wants to sell the house ie he wants half of his share from sale of the house. House could be worth £375,000 in today’s value (so my friend’s share could be worth £187,000 depending on the sale price).

My friend knows that he has to pay Capital Gains tax on the share of the house gifted to him by his mother. But he is unsure how it will be worked out.

1. Does he have to pay CGT on the value of the whole share of the house? Or is it the difference of the value of his share when it was given to him and the value today?

It is based on difference between his share of the value of the asset when he acquire/recd it (ie 2 yrs ago), and his share of the disposal proceeds.

Less his share of any improvement costs, acquisition & disposal costs (inc any assocaited professional fees).

Less any prev reported cgt losses

Less his unused annual cgt allowance

Residual taxed at 28% for a Higher Rate tax payer.

Shimla wrote: »

2. Also will the money from the sale of the house be counted as his income for tax purposes and taxed as income as well as CGT.

Thanks in advance.

Shimla

No, he reports it within his annual SA, under the CGT reporting page.

It will not affect his income band or annual IT, but obv his 2013/14 CGT allowance (currently £10,900 2013/14) will have been exhausted if he has any residual CGT liability to pay. (ie after deduction of all costings and annual cgt allowance).

Hope this helps

Holly x

Shimla

Thanks to holly hobby and John Pierpoint for your replies - I will pass the info to my friend. The situation is clearer now. The person was getting conflicting advice before.

John_Pierpoint

I am a little confused by your posting.

I think I know what you are getting at BUT you are in a possibly complicated mess, depending on the dead of variations wording.

You might want to reproduce it here - with the names taken out obviously.

Could you delete this entry (click "edit") and repost as a new thread of its own in the format:

Mum and dad had x children, all of whom are now adult.

Mum died ddmmyyyy leaving assets worth £999,999 for which xxx,xxx went to dad and yy,yyy were left to a trust [we need to know the type of trust - interest in possession OR discretionary, intended to last for the lifetime of dad OR yy years.]
The trustees are mmmmm, ssss & dddd, the same as the executors of mum's will (?)

Now Dad has died - the assets in his own name are worth a net of debt value of £999.999 and the trust assets are fixed interest securities now worth £aaa,aaa and yielding a gross income of £b,bbb per year.

Inheritance_worry

Hi I have left my house half to my wife and a quarter each to my sons the house is worthy£550.000 so my wife's share is £275 and my sons share is 275 split between them will they have to pay any inheritance tax ???

Mojisola

Inheritance_worry wrote: »

Hi I have left my house half to my wife and a quarter each to my sons the house is worthy£550.000 so my wife's share is £275 and my sons share is 275 split between them will they have to pay any inheritance tax ???

The recipients don't pay inheritance tax - it's taken from the estate before the beneficiaries are given anything.

Why not think about you and your wife owning the house between you? That will prevent some potential problems - one of your sons is desperate for money and forces your widow to sell her home so that he can get at his inheritance or your widow needs to downsize but will only have the value of half the house to buy something new.