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

heleen

Your mother had no estate other than £2000 and gave relatively small amounts of money to teh kids. The combined amount falls under the IHT threshold so you're fine.

HugoFS

My mother made out a will some years ago in which she left here entire estate, including the family home, in equal parts to her four children. After my brother died, she made out a new will to the effect that the quarter share my brother would have had should be divided into two thirds for his only son and one third to his widow.

My mother suffers from dementia and is not now capable of changing her will. The family home is estimated to be worth around £1.25M. The rest of the estate is around £200K but running down quickly because of care costs. As my parents were married until my father died some years ago, and he left all his property to my mother, I understand she gets twice the single person's allowances for IHT.

Thus, the new IHT Family Home provision is obviously attractive with her estate as it stands today. However, as my sister-in-law, not a direct descendant obviously, is due one twelfth of the estate, will the Family Home Allowance be available? Is it an all-or-nothing thing?

If it is, what possible alternatives are there? For instance, can those concerned agree to change the will (after my mother's death) to the effect that my sister-in-law gets paid a twelfth of the value of the total estate but only from funds not arising from the house itself? I believe this mechanism is called a Deed of Variation. Is this likely to be accepted by Probate (and HMRC, if they have a say)?

Any thoughts gratefully accepted.

Keep_pedalling

That is a good question. As the value of the house is way over the maximum private residence relief that will be available then your SILs bequest should not effect the nil rate band that applies at the time of your mother's death, as the vast majority of it is still being passed on to direct descendants.

This might change if her estate is reduced greatly by care costs, but if that happens IHT is probably not going to be much of an issue.

At the time you may need to take legal advice on the matter, and a DoV might be needed but that can only be done with your SILs agreement.

HugoFS

Thanks, Keep pedalling

I see what you're saying, but my big concern is that the estate will have to pay tax on the part of the property value that would be exempt if the Family Home Allowance applied, because my sister-in-law is not a direct descendant. This would be £200K from next year, rising to £350K in 2020, all other things being equal, so a tax saving of £80K to £140K over time. If it's an all-or-nothing allowance, I need to take steps now to avoid losing a large sum in tax in future. You say "vast majority of it is still being passed on to direct descendants" but I can't see anywhere in the advice I've read where it says any such thing. Maybe it's a matter of interpretation, but the text I can see says:

" a residential property, which has been their residence at some point and is included in their estate, is left to one or more direct descendants on death"

which doesn't help me much, as it isn't clear whether the legatees all must be direct descendants, or only some of them. I've tried looking in the various Finance Acts covering IHT but none of them seemed to help. Is there something I'm missing?

RatherConfused

Going round in circles !!! Literally for a year now as different advisors suggest different solutions !

Heres the summary ;-

2 parents age 84
Main residence 1.4m (no mortgage)
8 flats 1m (no mortgage)

2 children
IHT Liablity today assesed at 780,000

Aim ; reduce inheritance tax

Background : lawyer has suggested 2 options

1. take mortgage of house for 500k and invest in aim shares
2. sell 2 flats raise 400k and mitigate iht

ps parents dont qualify for life insurance


question ?

1. whats the best solutions to mitigate IHT ?
2. i have around 500k cash and live offshore with offshore company. is it possible to use the cash to create a lien against some of the property to reduce iht ie by way of issuing a mortgage or other ?

thanks in advance

Keep_pedalling

I think they have left it rather late for IHT planning. I would not encourage them to start investing in high risk AIM shares. Apart from the risk associated with the shares, they still need to survive 2 years for that solution to be effective, and a IHT rule change could put those shares back in to IHT teritory at the stoke of the chancellor's pen.

Selling or giving you and your sibling some of their property could work if they survived 7 years , but they will almost certainly be hit with a rather large CGT bill on disposal so that risks a double tax hit if they don't survive 7 years.

The one way they could avoid their estates paying any IHT is to give everything above the nil rate band to charity.

RatherConfused

thanks !

what about these 2 options ?

1. gifting the 1.4m house ?

dont you get an immediate 60pc relief on IHT going up to 100pc over 7 years ?

the 7 year rule ?

2. can they mortgage the flats to create a lien ? any benefit there ?

3. can i use 500k i have in cash to mitigate IHT ?

Keep_pedalling

RatherConfused wrote: »

thanks !

what about these 2 options ?

1. gifting the 1.4m house ?

dont you get an immediate 60pc relief on IHT going up to 100pc over 7 years ?

the 7 year rule ?

2. can they mortgage the flats to create a lien ? any benefit there ?

3. can i use 500k i have in cash to mitigate IHT ?

You do get taper relief when gifting over the nil rate band, but it does not kick in until 3 years have passed, and the reduction is 20% it does not hit 60% until 5 years have past.

If they gift you the house, they would either have to move out, or pay you full market rent otherwise it would never fall out of their estate and you could face the CGT hit as well when you came to sell.

I can't see how the other 2 options would work, but look on the bright side you will still inherit a substantial amount of money, and if either of you parents ever need care support they are in a position to pay for the best available 40% of which will offset by reduced IHT.

SeniorSam

If I may mention a couple of small points not covered, although you may know of these. The Trust does not pay tax on anything other than income, so any capital that can be invested should ideally be invested in growth to avoid tax. Funds rather than shares, which can have a 'safer' element if chosen wisely.

The second point being that the children do not HAVE to receive the benefit of the trust on death of the second parent, or at all if they do not wish to. If they are sufficiently wealthy, or not actually needing the assets at that time, they can defer taking the benefit and leave the assets to grow in the Trust, possibly taking some benefit by way of loans from the trust, to be repaid from their estates, which is another way to ensure the Trust is maintained. They could also wish to avoid being a benficiary at all and the Trustees could therefore elect others to be the beneficiaries if all Trustees are in agreement.

Having professionals such as Banks (the worst) solicitors or accountants as Trustees can become extreemly expensive as their charges can become extrotionate and if at all possible, consideration should be given to appointing family members, but remember that they need to be TRUSTED members that can be relied upon to 'do the right thing'.

Interest in possession trusts should not be considered at all now as Discretionary Trusts will have the flexibility needed to ensure the estate is protected and whilst the surviving spouse is alive, loans can be made to help support him/her.

Perhaps a little more reading is needed or advice from others.?

Sam

Violet_barrow

We are considering selling our rental properties (no mortgages) and giving money to kids to buy a house each, they pay us same amount we get from rental properties in form of interest free mortgage all drawn up legally by solicitor with set terms, what ifs (i.e. Divorce , death etc) My question is will they have to pay inheritance tax should we die within 7 years of setting it up, if we deed them the house free of repayments on our death. Are there any pitfalls to our tax liability by doing this? We will keep our marital home and live in that as that will be the full inheritance tax liability but we will then not own rental houses that will be an inheritance tax liability for the children but as their mortgagee they pay us until the debt is paid or upon our death. Advice appreciated .