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

localhero

Hi Chris2fer,

Generally you are thinking on the right lines in advising your parents to own their property as tenants in common and set up a trust in their wills, and I will address your points in turn.

a) Without a trust, then upon first death 1) you or your sister may demand your share of the property; or 2) and even if you didn't, you or your sister may get divorced; or 3) go bankrupt. Any of these scenarios would put the surviving spouse at an unnecessary risk. A trust would therefore avoid all those pitfalls.

b) With a trust then if the surviving spouse required care the local authority are not entitled to place a charge on the share of the property that they own. This is because with a share of the property owned by a trust, the remaining share on the open market is worth nothing or next to nothing. This is known as the Palfrey principle.

The local authority doubtless will try and place a charge, but this is unlawful and should be resisted. This is not deliberate deprivation as has been suggested as it is the spouse who's already died (and not requiring care) that has brought this about - and they after all, can leave their estates to whom they wish.

However, it is illegal to sign your house over to relatives whilst your still alive to avoid care fees - but this is completely different and within the law.

c) CGT - without the trust you and your sister would be liable to CGT if the property is not your main residence, but with either trust you've mentioned you wouldn't be.

So what to do? Since your parents are quite close to the nil rate band threshold I would advise on the nil rate band discretionary trust. Since property values historically increase faster than the tax threshold it is possible that your parents' estate may soon exceed the nil rate band.

It's also possible that they might come into some money from elsewhere such as inheritance or on the lottery - though if they won millions they would require more extensive tax planning.

The only proviso is that the trustees should be chosen with care, but this set up would work very well in avoiding all the problems that you've envisaged. Best wishes.

Ps Monkeyspanner, I would not rely on a Deed of Variation, since they are expensive and there's always the risk that they could be abolished - it almost happened once before.

harryhound

On your own rented out home, there are some valuable additional allowances that protect you against CGT if the house has been a principal private residence before it was rented out and for 3 years when you come to sell it.
If you search the forum directly or via Google (eg paste: "principal private residence" site:forums.moneysavingexpert.com into Google) you should find more details.
On the 1/4 share of the family home, the trust would be liable for CGT, assuming the house rises in value. Beware of getting into arguments about the low value of the house when it was owned three ways compared to the value when it was eventually sold on the open market.

For what it is worth, my father left my sister and me, half the family home. We always understood it was morally our mother's and did not get divorced or go bankrupt; nor did our mother remarry a toy boy. Over the years there were discussions about its maintenance, not forgetting the maintenance of the garden as mother became increasingly frail.
There was also occasional friction as mother did not really like having to consult her children about her plans for her future, which I had to counter with observations about who had she planned to leave the home to anyway, or was she thinking of taking it with her. The triple ownership protected her from "rogue traders"; though we did have problems with idiot estate agents and similar con men, who tried to cultivate her. Investing 3 GBP with the Land Registry would have saved them their time and trouble. Eventually she was able to stay in her home with 24 hour care, which cost little more than than a grotty shared bedroom care home.
I suppose it all depends how well you are prepared to stick together as a family, and set aside the inevitable little disagreements.

colettejm

Hi Localhero and thanks but what is probate?
My dad is not married but cohabitating. He has been making gifts but they have been over 3k.
Can I also recap on the advice you gave me- he has a joint bank account with my sister at present so in the event of his death she will be the owner.

chris2fer

Thank your for you replys, this is a very complicated area and your help is appreciated.


chris2fer

localhero

Colettejm - Probate is the formal process of the executors obtaining approval to act for the deceased.

Yes, any money in a joint bank account will pass automatically to the other upon the death of either party.

EdInvestor

localhero wrote: »

b) With a trust then if the surviving spouse required care the local authority are not entitled to place a charge on the share of the property that they own. This is because with a share of the property owned by a trust, the remaining share on the open market is worth nothing or next to nothing. This is known as the Palfrey principle.

The local authority doubtless will try and place a charge, but this is unlawful and should be resisted. This is not deliberate deprivation as has been suggested as it is the spouse who's already died (and not requiring care) that has brought this about - and they after all, can leave their estates to whom they wish.

But surely it is going to be seen as deliberate deprivation if the total estate is under the IHT level? Why would a trust have been needed?

When you say a charge is unlawful and should be resisted, how do you suggest people go about stopping it?

localhero

Hi Edinvestor,

There are many reasons for leaving an estate in trust instead of making an outright gift to the surviving spouse. Apart from IHT planning, a testator may fear that the surviving spouse could remarry, have more children etc.

So if he wants the certainty of his own children inheriting his estate he would be well advised to set things up in that way. In any case his motives are irrelevant - he is depriving his spouse maybe, but not the local authority.

When a surviving spouse requires care, unfortunately the local authority in most cases will try and place a charge on the property, and in many cases they succeed in obtaining their fees simply because most families do not know the law.

To resist a charge being placed is a legal issue, and I would advise any families in the situation described to obtain the services of a good solicitor to strongly oppose the charge. The local authority once reminded of the law will usually back off.

A lot of families don't have the resources or the will to fight however, but the law is actually on their side.

harryhound

colettejm wrote: »

Hi Localhero and thanks but what is probate?
My dad is not married but cohabitating. He has been making gifts but they have been over 3k.
Can I also recap on the advice you gave me- he has a joint bank account with my sister at present so in the event of his death she will be the owner.

Hi collette,

On another thread, about changing a will, I have posted a description of how it was for my sister and me, when we obtained Probate.

In your case it would appear that there could be a risk of family discord (?!) so you need to tread carefully.

Harry

PS I had a joint account, from which I paid mum's carer and household expenses, of course I gave my sister half the balance when I sent in the death certificate and it became "legally" mine.
I notice that one of the stipulations, of the new Lasting Power of Attorney, can be that the attorney produces accounts. I would recommend ANYONE looking after someone else's money keeps accounts to protect their reputation. (In my case, the local "Day Centre" that gave the carer some respite was a pain in the neck, it might only have been a fiver or a tenner per week BUT I still think that taking money without a receipt is an encouragement to fraud/theft.)

Original posting via google: "legal dog" site:forums.moneysavingexpert.com

or here

http://forums.moneysavingexpert.com/showthread.html?p=5050579&highlight=legal+dog#post5050579

MrChips

My grandmother is 98 and has recently had to leave her house and move into a care home. My family are trying to look after her estate and well being and we are starting to think about trying to minimise inheritance tax liability too.

She owns a house which we thought was worth about £400,000 but it has just been valued at about £600,000! :eek: The rise in price isn't good news as we don't want to have to sell it when she passes away to pay the tax bill as it houses my father's study and extensive book collection (he is an academic), and my sister has just had another baby and outgrown her current house and would like to move there. My grandmother also has about £200,000 in various more liquid investments.

Clearly she is well above the nil rate band as it stands. However she is in relatively good health and I am optimistic she could well survive for several more years. She only had to leave her home after a succession of falls, but she it still quite sharp .

Currently the liquid assets could be used to pay the inheritance tax bill. However if the house value rises much further this wouldn't be possible. My sister could raise about £300,000 of her own money by selling her current home. I am wondering if there is anything wrong with the following plan...

• My grandmother gifts my sister the £200,000
• My sister buys the house from her for £500,000 (ie £200k gift plus her £300k)
• My sister then has the house but has paid £100k less than it is worth
• My grandmother's estate for tax purposes is then £500k cash plus a gift to my sister (I believe Potentially Exempt Transfer is the nomenclature!) of £200k plus another PET of £100k from the cheap house sale. £800k in total still. However now the link to house prices is removed and if she lives for over 3 years from the date of sale the value of the PET for tax purposes starts to reduce due to taper relief.
• Potentially she could make further gifts which would again reduce the value of her estate for tax purposes if she lives for another 3 or more years.
• The above is the main idea, however I am also wondering if there is anything we can do to reduce the value of the house. For instance by having tenants there, or if we have a right to use the garage to park our car or something like this?

Clearly we have left it rather late in the day to start inheritance tax planning, we just never thought it would be an issue as we never considered the house to be that valuable. We also thought my grandmother was indestructable! Up until last year she was still gardening regularly and very independant.

Thanks in advance for any advice.

localhero

Hi MrChips,

The major flaw in your plan is with taper relief. If your nan makes gifts of £300,000 and she dies within 7 years, then these gifts will use up her nil rate band threshold first.

Taper relief will only be applied to the value of any gifts that exceed her nil rate band threshold. So unless she survives 7 years the gifts will be a pointless exercise.

I don't think moving tenants in there would work, since if there was an assured shorthold tenancy (which is the usual type) then this would not reduce the value by much if anything. If she grants a different type of lease which results in a 'sitting tenant' in situ when she dies, Revenue & customs would be bound to explore the possibility that this was a sham arrangement.

You say she wants to give £300,000 to your sister. Ultimately what does she want to do with the rest of her estate? Apart from your dad has she not got any other children, and if so why is she not giving her estate to them? One final question, I assume she is a widow - how long is it since your grand dad died?