Inheritence tax questions, help please

happyhero

Ok thanks for all that, the Skipton man said from the figures above that to avoid IHT the problem figure is £150,000 which is the amount above the £650,000. (My mother wants me to inherit it all in the end without having to pay any tax.)

So he said there are 3 ways to deal with this, one to spend it, two to gift it or three to put it in a trust and he was not pushing the trusts but he explained about 3 types of trust, a gift trust, a loan trust and I cannot remember the 3rd but he recommended the gift trust for various reasons if we chose the trust route.

My mother and stepfather decided they would like to pay off my mortgage which is £70,000 by way of a gift by giving me £35,000 each now thus lowering the possible amount that is liable to IHT but a question that then came up later after we had left the advisers office, and that was what if my stepfather did not live 7 years after this gift, we are not sure how this would pan out, would I have to pay IHT on his gift of £35,000?

We did talk about taper relief and the fact that the closer you get to 7 years the IHT tax is reduced but he explained that the answer to this was yes and no and that people often get this wrong, he explained that taper relief could only be applied to an amount about the £325,000 threshold, i.e. if you gave away £400,000 then it could apply to £75,000 but if you gave away £300,000 then you could not apply taper relief.


As for the question on type of tenancy I will come back on that one as my mother changed that a while ago but is now not sure which she has so we will check her papers.

So would I have to pay IHT on the £35,000 if anything happened to my stepfather before the 7 years is up?

CLAPTON

happyhero wrote: »

Ok thanks for all that, the Skipton man said from the figures above that to avoid IHT the problem figure is £150,000 which is the amount above the £650,000. (My mother wants me to inherit it all in the end without having to pay any tax.)

So he said there are 3 ways to deal with this, one to spend it, two to gift it or three to put it in a trust and he was not pushing the trusts but he explained about 3 types of trust, a gift trust, a loan trust and I cannot remember the 3rd but he recommended the gift trust for various reasons if we chose the trust route.

My mother and stepfather decided they would like to pay off my mortgage which is £70,000 by way of a gift by giving me £35,000 each now thus lowering the possible amount that is liable to IHT but a question that then came up later after we had left the advisers office, and that was what if my stepfather did not live 7 years after this gift, we are not sure how this would pan out, would I have to pay IHT on his gift of £35,000?

We did talk about taper relief and the fact that the closer you get to 7 years the IHT tax is reduced but he explained that the answer to this was yes and no and that people often get this wrong, he explained that taper relief could only be applied to an amount about the £325,000 threshold, i.e. if you gave away £400,000 then it could apply to £75,000 but if you gave away £300,000 then you could not apply taper relief.


As for the question on type of tenancy I will come back on that one as my mother changed that a while ago but is now not sure which she has so we will check her papers.

So would I have to pay IHT on the £35,000 if anything happened to my stepfather before the 7 years is up?

I know nothing about trusts so can't comment.


Taper relief doesn't apply on gifts unless a total of more than 325,000 are made in the 7 year period before death. (your advisor was correct)


If you were given 35,000 by your father and he died before 7 years then
a. there would be no IHT to pay from his estate
b. but the transferrable IHT allowance would be reduced by 35,000; so on second death the IHT allowance would be 325,000 +290,000 (as of now: the reduction is actually a percentage)
However, you are no worse off as the total of the inheritance is similarly reduced by 35,000


PS : if your step mother is in good health then it might be better for her to give you the 70,000.

CLAPTON

moneyfoolish wrote: »

Joint tenants and 4 children. My understanding is that the house would automatically go to the remaining spouse as would everything in joint accounts.

there is no IHT on first death as everything becomes the surviving spouse's

joint a/c (including the house) do automatically become the property of the survivor plus the survivor get the first 250,000 of the non-joint assets

happyhero

Big thank you to everybody but especially you CLAPTON very helpful. I did mention to my mother maybe it would be better if she gave me the £70,000 but that was without realising the way it works above i.e. the £290,000 bit you mention. I manage their investments now and I was trying to think of a way to get the £35,000 back to her without effecting the tax, i.e. from my stepfathers money to her without having any effect on the IHT side of things, although she would inherit it anyway eventually I suppose. I think my mother preferred that they help me equally so that my stepfather felt he helped as well.

Am I right in thinking that after this gift and after 7 years the £290,000 would revert back to £325,000 via my mother, becoming £650,000 once again?

But hang on a minute wouldn't my mothers £325,000 be reduced too to £290,000 if she passed before the 7 years had passed?

Basically I am asking, assuming they both give me £35,000 where will my mother's figure be at after the 7 years if my father has passed?

I feel horrible talking about this stuff and passing and things but it needs sorting out I suppose, and my mother is very keen to get it all sorted out, so on we go.

ANGLICANPAT

If the happyhero seniors are desperate to avoid IHT albeit it would mean that the final survivor would be surviving on less, then
given theres no IT to pay when the first partner dies , and their allowance passes to the second , wouldnt it work if happyhero's parents just worked out how much over the £650k the estate would likely be when the second person died, and just changed their wills to each leave happyhero that amount (so she/he would get it after the first death)?

After the first death , surviving parent can revamp their will however they want. It would of course mean the surviving parent couldnt demand the 'surplus' amount back , but neither would there be any 7yr wait for money 'gifted' in life , to clear .

CLAPTON

happyhero wrote: »

Big thank you to everybody but especially you CLAPTON very helpful. I did mention to my mother maybe it would be better if she gave me the £70,000 but that was without realising the way it works above i.e. the £290,000 bit you mention. I manage their investments now and I was trying to think of a way to get the £35,000 back to her without effecting the tax, i.e. from my stepfathers money to her without having any effect on the IHT side of things, although she would inherit it anyway eventually I suppose. I think my mother preferred that they help me equally so that my stepfather felt he helped as well.

Am I right in thinking that after this gift and after 7 years the £290,000 would revert back to £325,000 via my mother, becoming £650,000 once again?

But hang on a minute wouldn't my mothers £325,000 be reduced too to £290,000 if she passed before the 7 years had passed?

Basically I am asking, assuming they both give me £35,000 where will my mother's figure be at after the 7 years if my father has passed?

I feel horrible talking about this stuff and passing and things but it needs sorting out I suppose, and my mother is very keen to get it all sorted out, so on we go.

if your father dies before 7 years then his IHT allowance, passed to your step mother, will be 290,000
if he lives for 7 years then it will be 325,000

if your step mother dies in less than 7 years then her own IHT allowance is effectively 290,000 too

so if they both die in less than 7 years then the IHT allowance applicable on second death will be 2 x 290,000

so the IHT allowance on second death could be
650,000 if both survive 7 years
615,000 if only one survives 7 years
580,000 if both die before 7 years

CLAPTON

ANGLICANPAT wrote: »

If the happyhero seniors are desperate to avoid IHT albeit it would mean that the final survivor would be surviving on less, then
given theres no IT to pay when the first partner dies , and their allowance passes to the second , wouldnt it work if happyhero's parents just worked out how much over the £650k the estate would likely be when the second person died, and just changed their wills to each leave happyhero that amount (so she/he would get it after the first death)?

After the first death , surviving parent can revamp their will however they want. It would of course mean the surviving parent couldnt demand the 'surplus' amount back , but neither would there be any 7yr wait for money 'gifted' in life , to clear .

who gives what to whom and when?

Aegis

happyhero wrote: »

Ok thanks for all that, the Skipton man said from the figures above that to avoid IHT the problem figure is £150,000 which is the amount above the £650,000. (My mother wants me to inherit it all in the end without having to pay any tax.)

So he said there are 3 ways to deal with this, one to spend it, two to gift it or three to put it in a trust and he was not pushing the trusts but he explained about 3 types of trust, a gift trust, a loan trust and I cannot remember the 3rd but he recommended the gift trust for various reasons if we chose the trust route.

This is a bit of an over-simplification. It misses out two other relatively common options, namely insuring against the potential liability and holding exempt assets. Others have mentioned the charitable gift exemption, however this is not much use if the goal is to maximise the net amount inherited by the beneficiaries.

Insurance generally results in a gradual reduction of the net value of the estate over time due to the premiums, so many people don't like that, but whole of life policies will generally pay out more than they cost in premiums because of the cross-subsidy effect of people allowing their policies to lapse when they no longer need them. Strictly speaking this results in a similar level of tax being paid as doing nothing, but the net effect is usually positive.

Exempt assets are relatively interesting for some people, as the exemptions usually kick in after two years rather than seven, however the assets being held are often high risk (AIM shares are a classic example). This is usually a strategy for those with relatively short life expectancies, but it's sometimes worth considering if the client has a high tolerance for investment risk, especially if the goal is to pay less tax at all cost.

My mother and stepfather decided they would like to pay off my mortgage which is £70,000 by way of a gift by giving me £35,000 each now thus lowering the possible amount that is liable to IHT but a question that then came up later after we had left the advisers office, and that was what if my stepfather did not live 7 years after this gift, we are not sure how this would pan out, would I have to pay IHT on his gift of £35,000?

Bear in mind that each parent likely has two years' worth of annual gift allowances, therefore the first £6,000 each will probably be immediately exempt. Given your concerns over your stepfather's health, you may wish to consider whether the bulk of the gift should come from your mother instead. If she gifts £64,000 to you (the other £6,000 coming from your step father but being immediately exempt), then that will potentially result in £58,000 of taxable gift. It is then possible, if you are still concerned, to take out a seven-year term assurance policy to cover the gift in the event of your mother dying before the gift leaves her estate. The cost of this might be prohibitive, but if not the benefits can be written into trust and the premiums can (likely) fall under the habitual gifting from excess income exemption, which can therefore fall outside the estate immediately.

This type of plan is generally quite reliable, as once the policy is set up, it either lapses after seven years and the gift is exempt or it pays out and covers the lost nil rate band with essentially an early advance on the rest of the estate.

Be careful with inheritance tax. It's a very in-depth subject and not something most bank/building society financial advisers will deal with regularly.

Mojisola

Aegis wrote: »

Given your concerns over your stepfather's health, you may wish to consider whether the bulk of the gift should come from your mother instead.

If she gifts £64,000 to you (the other £6,000 coming from your step father but being immediately exempt), then that will potentially result in £58,000 of taxable gift.

It is then possible, if you are still concerned, to take out a seven-year term assurance policy to cover the gift in the event of your mother dying before the gift leaves her estate.

If the aim is not to pay tax, it seems odd to be happy to pay an insurance company instead - the money is still leaving the estate (or being paid by beneficiary).

I would follow Aegis' plan but keep your fingers crossed that your Mum is with you for many years to come.

Aegis

Mojisola wrote: »

If the aim is not to pay tax, it seems odd to be happy to pay an insurance company instead - the money is still leaving the estate (or being paid by beneficiary).

I would follow Aegis' plan but keep your fingers crossed that your Mum is with you for many years to come.

Agreed, but I like to cover all options when I deal with this sort of situation for clients, so I thought I'd mention it.