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

getmore4less

who get the rent from the rental property?

If the MIL gets it all looks like a gift with reservation you might be looking at the value of all 5 houses when the IHT issue comes up.

If she starts shuffling properties there will be CGT calulations needed allthough the sell her current one(has she lifed in it for the full time she owned it?) and move into the one you currently live in will have relevent relief so no tax to pay, future disposals will not have the same reliefs.

holly_hobby

Yes as GM4L raises, IF MIL receives rental income or any benefit from the rented dwelling, there are indeed GWR/POAT AND on disposal CGT issues (as a benefical owner) to address - if she doesn't receive rent nor will receive benefit on sale, then the PET regs as discussed are pertinent. Both are relevant if her net estate exceeds nil rate exemptions on death, and the PET remains a non-exempt gift (ie she dies within 7 yrs of pch in childs names, or tsfing the property into their ownership).

CGT is on disposal (sale), so if she sells her primary residence (which I presume has been so since purchase) or within 18 mths of her vacation (taking account of scheduled April 2014 PRR amendment), then any gain will be fully PRR exempt.

As the 2nd property (she is now to occupy) hasn't been MILs primary home from pch, it will be subject to a CGT computation upon disposal.

The chargeable gain over the period of ownership, will then be recalculated to take account of qualifying PRR exemption periods, various reliefs (eg lettings relief, prev reported CGT losses of each beneficial owner/s), exemptions (inc personal annual unused CGT exemption), costing allowances (eg -acquisition, disposal, improvement, professional (bar incurred in respect of cgt reporting).

MIL obv needs to speak to her own tax pracitioner regarding such tax issues, and with respect to tax managment of her portfolio .

Hope this helps

Holly

doyleuk

holly_hobby wrote: »

The monetary gift from MIL will be classed as a Potentially Exempt Transfer (PET). If MIL retains no benefit from the gifted capital (ie you don't pay her rent etc, nothing in her name, she won't have her own room she can reside in when she wants), and if she survives 7 yrs post donation, it will NOT form part of her estate on death at point, and will be classified as an exempt gift.

If she dies within 7 yrs of the donation, then the amount of gift is included within the valuation of her estate, and yes if the NET (of commitments) value of her estate exceeds available nil rate exemptions (which coudl be upto 650k if there is a deceased spouse in the background), there will be IHT on the excess.


And lastly, in respect of you and wife being party (with other siblings) to another property (rented), this will need to be disclosed within any mge application as a retained property - if its not mortgaged no probs (apart from possible LTV restriction to 85% or less) , BUT if it is mortgaged then there may also be an affordability issue depending on the figs, and if its set aside or not - your mge adviser will expand further on this area for you.

Lot to consider

Holly x

Thanks for all your information. MIL will not benefit from the gift. I wasnt sure of the value of the gifts as its likely to be c£80k had any impact.

In terms of the rental property, There is no mortgage on it. So shouldnt affect our ability to get a mortgage of the new house. MIL does receive rental income from this. This property may be sold if its more efficient.

Thanks for all your replies, Definately makes a little more sense. Booking an appointment with an Accountant to discuss situation to ensure fully compliant and most efficient.

Cheers

D

Philb5

My sister and I both have LPA for my 94 year old mother.

1. As we have LPA are we able to receive amounts from her towards her 3000 UKP annual IHT exemption?
2. She has said she wants to give us money (400 UKP each) as christmas gift, is this treated as a separate gift in it's own right and not considered for estate purposes, or will it have to be documented and assessable against the estate tax liability if she dies in the next 7 years? Also does it have to be part of the 3000 annual IHT exemption?

If I have posted in the wrong place, please redirect me appropriately.

Thanks.

thebeardofzeus

Hi, my dad passed away recently but didn't leave a will. A year before he died he transferred the house over to his children, giving one 50%, another 25% and the other two 12.5% each. The house is valued at ~£340,000. He also left ~£20,000 in cash in a bank account and was never married. My understanding is that the person owning £50% of the property will have to pay inheritance tax as it exceeds £150,000. Is there a way to avoid paying inheritance tax?

Thanks

holly_hobby

Even if Dad moved out (so we're out of gift with reservation waters), and the tsf was a true PET, they'll still be quite a bit of exposure ... refer the attached taper relief details http://www.hmrc.gov.uk/inheritancetax/how-to-value-estate/gifts.htm#3

Its the net value of his estate (including any non-exempt gifts/tsfs) that is exposed to IHT, which is the excess over 325k (as there is no deceased spouse exemption available) @ 40%, payable by and from his estate, before any bequests can be made.

If there is insufficient capital within the estate, then the HMRC can pursue beneficiaries ... although payment arrangements ie when property is involved, can be made - http://www.hmrc.gov.uk/inheritancetax/paying-iht/yearly-instalments/index.htm.

Holly

Mojisola

thebeardofzeus wrote: »

The house is valued at ~£340,000. He also left ~£20,000 in cash in a bank account and was never married.

Your father's estate has a threshold of £325,000 so there will be tax to pay on £35,000. That can be paid out of the cash.

Willman_Rodders

£3000 of the total gifts will be his annual exemption. And assuming father did not use his allowance in the previous year he can carry forward his unused allowance for that year too) Thus the £35,000 exposure (referred to in the previous post) could be reduced to £29,000.

More details here ...

http://www.hmrc.gov.uk/inheritancetax/pass-money-property/exempt-gifts.htm#2

Funeral expenses and estate administration will reduce further the net value of the estate. And the IHT liability can be paid from the cash holding - assuming there is sufficient remaining after funeral costs and estate administration fees.

ouibay1

Apologies in advance for this long post, but I have looked through this site and others for some time now but I haven’t found a situation as unique as ours so I am hoping to get some advice from this forum about minimising IHT/CGT .

Mum and Dad own their house which they live in alone; value ~ 900k. They also jointly own a flat along with myself and my brother; value ~ 600k. Flat was inherited by my Dad from my Aunt and it was put in our four names as Joint Tenants (we do have other siblings).


This transfer happened over 7 years ago so it should qualify as a PET.


The flat was lived in by myself until recently but now is being rented out with myself as the landlord with all rent coming to me. I do not own any other property but my brother owns a house.


What is our current position regarding IHT when the inevitable happens to dad or mum? The way I understand it is that on my Dad’s passing (or Mum’s) then his share of the flat (¼ = 150k) would pass equally to my mum, my brother and me as Joint Tenants. Would Dad’s ¼ share in the flat count towards his estate for IHT purposes or would it be disregarded as we own the flat as Joint tenants? Also his half of the house (1/2 share = 450k) would pass to his spouse, my mum, which would not be subject to IHT either.


Am I correct in understanding it this way or have I over-looked something?

The potential issues I can see with the current situation, if I have interpreted it correctly, is that firstly, the remaining spouse will then have an even larger estate, posing high IHT exposure further down the line. Secondly, the possibility of residential care costs arising and Mum or Dad needing to fund these because their estate is large. They are elderly and Dad already requires daily carer visits to assist in getting washed/dressed.

Considering these two issues I believe it would be beneficial to remove my mum and dad from ownership of the flat, so my question is how best to do this for tax purposes?

If we sold the flat now then I assume my dad, mum and brother would have to pay CGT but I wouldn’t as I would qualify for Principal Residence Relief. So basically we would have to pay ¾ of the CGT? Is that correct?

What would be the situation if the property was gifted to me solely? As I am the only non-homeowner then I would not be subject to any CGT when the flat was sold as I would qualify for PRR? But I have been reading up on Disposal of Assets and believe that if the flat was gifted to me then the ‘giftors’ would be liable to pay CGT on the flat, even though it would be a free gift with no monetary exchange? Is that correct?


Also if we gifted the flat to myself solely now and paid CGT, what would be the position should me dad/mum pass away within 7 years? Would we have a double whammy of IHT also because it’s not considered a PET?


Is there a better way of doing things which I have overlooked? Any advice or guidance would be much appreciated because I have a feeling we are going to need professional advice on this.


Also, I recall previous posts in this thread highlighting the possibility of a remaining spouse re-marrying and the possible ramifications of this. But that is never going to happen in my mum or dad’s case so isn’t a consideration for us.


Thanks in advance.

holly_hobby

ouibay1 wrote: »

Mum and Dad own their house which they live in alone; value ~ 900k.

This will transfer to the surviving owner on death, and there is no IHT between spouses.

Of course that means that there would be IHT on 2nd death.

If the entire estate of the 1st deceased spouse (and there were NO non-exempt gifts in the background at time of death) transferred to the survivor - his full IHT nil rate exemption would remain in tact.

Meaning their full nil rate IHT exemption (currently 325k pp) is available for addition to the nil rate IHT exemption of the surviving spouse on their death (this is done by application to HMRC by their executor), giving the surviving spouses estate, a nil rate threshold of upto 650k (ie 2 x 325k*) *this is based on current IHT exemptions, and for ease assuming there are no non-exmpt gifts in play on either death. http://www.hmrc.gov.uk/inheritancetax/intro/transfer-threshold.htm

ouibay1 wrote: »

They also jointly own a flat along with myself and my brother; value ~ 600k. Flat was inherited by my Dad from my Aunt and it was put in our four names as Joint Tenants (we do have other siblings).

This would be a chargeable event for CGT (ex spouse), but if this was done immediately, then there would little or no difference to the value on inheritance (aunts death) to market value on tsf, so either no CGT at all, or within his annual exemption in any event.

http://www.hmrc.gov.uk/cgt/intro/gifts-inherit-divorce.htm

The 50% tsfd to you and bro would be a PET against his estate. http://www.hmrc.gov.uk/inheritancetax/pass-money-property/exempt-gifts.htm#4

ouibay1 wrote: »

This transfer happened over 7 years ago so it should qualify as a PET.

Yes, only if he retained no financial interest in respect to tsfd share - otherwise the 50% given to you and bro would be a gift with reservation. http://www.hmrc.gov.uk/manuals/ihtmanual/ihtm04071.htm

ouibay1 wrote: »

The flat was lived in by myself until recently but now is being rented out with myself as the landlord with all rent coming to me. I do not own any other property but my brother owns a house.

What is our current position regarding IHT when the inevitable happens to dad or mum? The way I understand it is that on my Dad’s passing (or Mum’s) then his share of the flat (¼ = 150k) would pass equally to my mum, my brother and me as Joint Tenants. Would Dad’s ¼ share in the flat count towards his estate for IHT purposes or would it be disregarded as we own the flat as Joint tenants?

If you are joint tenants yes it will be excluded from his estate and pass to the survivors - if its held as tenants in common the value of his share will be inc in his estate.

As the ownership is between 2 spouses and 2 children (ie not exclusively parents, where rent would be automatically assessed as 50/50 under joint tenancy, but essentially 3 separate parties ie parents and 2 children), you should be ok in just declaring the rental under your name. And you will need if not already, or after the 1st yr of rental, to delcare the net (of permitted deductions) rental income to HMRC - but just check that with HMRC re mum and dads situ due to the jnt tenancy.

ouibay1 wrote: »

Also his half of the house (1/2 share = 450k) would pass to his spouse, my mum, which would not be subject to IHT either.

Am I correct in understanding it this way or have I over-looked something?

As above, no IHT on tsfs between spouses.

ouibay1 wrote: »

The potential issues I can see with the current situation, if I have interpreted it correctly, is that firstly, the remaining spouse will then have an even larger estate, posing high IHT exposure further down the line. Secondly, the possibility of residential care costs arising and Mum or Dad needing to fund these because their estate is large. They are elderly and Dad already requires daily carer visits to assist in getting washed/dressed.

Considering these two issues I believe it would be beneficial to remove my mum and dad from ownership of the flat, so my question is how best to do this for tax purposes?

Removing them won't affect qualification for state funded long term care, as it will be classed as deprivation of assets if the local authority can sucessfully assert that the tsf was conducted by the individual in knowledge that they would later be applying for financial assistance - and in Dads case that's all but certain - so their Means tested calcs will be conducted as if the tsf never occurred. http://www.ageuk.org.uk/Documents/EN-GB/Factsheets/FS40_deprivation_of_assets_in_the_means_test_for_care_home_provision_fcs.pdf?dtrk=true

Its also a chargeable event for CGT, even if no pennies exchange hands, as the tsf is between connected parties and is based on the market value - so mum, dad and bro would face CGT on 150k (less exemptions etc) each. Refer - http://www.hmrc.gov.uk/cgt/property/calc-cgt.htm

ouibay1 wrote: »

If we sold the flat now then I assume my dad, mum and brother would have to pay CGT but I wouldn’t as I would qualify for Principal Residence Relief. So basically we would have to pay ¾ of the CGT? Is that correct?

Yep = cgt for bro and parents

You qualify for PRR relief for the period it has been your primary residence & last 36 mths if you sell pre April 2014, if you sell post April 2014 it'll be the last 18 mths (regardless of residency status) - if you sell after that you will be subject to CGT on the net of exemption gain, less annual usued cgt allowance )£10,900 2013/14. £11k 2014/15), lettings relief (upto 40k), improvement, acquistion/disposal costs, and any prev reported cgt losses.

ouibay1 wrote: »

What would be the situation if the property was gifted to me solely? As I am the only non-homeowner then I would not be subject to any CGT when the flat was sold as I would qualify for PRR? But I have been reading up on Disposal of Assets and believe that if the flat was gifted to me then the ‘giftors’ would be liable to pay CGT on the flat, even though it would be a free gift with no monetary exchange? Is that correct?

Yes refer above.

ouibay1 wrote: »

Also if we gifted the flat to myself solely now and paid CGT, what would be the position should me dad/mum pass away within 7 years? Would we have a double whammy of IHT also because it’s not considered a PET?

Yes its also a PET - so if the net estate of bro or parents (inc any non-exempt gifts ie pets) and any unused deceased spousal transfer between parents, exceeds nil rate IHT threshold (refer above), their estate will be liable for IHT (payable from their estate unless the will expresses the beneficary pays)

ouibay1 wrote: »

Is there a better way of doing things which I have overlooked? Any advice or guidance would be much appreciated because I have a feeling we are going to need professional advice on this.

Yes, you need to speak to a IHT practitioner.

But if you want to tsf the property into your name, there is no way for the transferor(s) to avoid a CGT calc (as its a chargeable event ), or indeed the PET aspect of the gift if tsfd before death.

Additionally, (and I assume this property is mortgage free/unencumbered) if you pay any monies to the donating parties that exceed 125k in total, in exchange for ownership, you'll also have stamp duty land tax to pay.

Hope this helps

Holly