Inherticance Tax Help

youngcouple

I’m trying to help my mother in law figure out how best to benefit her children from her estate.

She owns a property without a mortgage that she currently rents out and lives off the income.
I understand she could gift the property to her two children now and providing she enjoys another 7 years and she doesn’t live in it, her children would be exempt from IHT.

However as she currently relies on the property's rental income, if she were to gift the house to the children and they continued to rent it out, and if they were to then gift her the rental proceeds (after tax) would this effect the validity of the IHT exemption?

Thanks for you help.

Wayne_O_Mac

youngcouple wrote: »

I’m trying to help my mother in law figure out how best to benefit her children from her estate.

By ensuring the appropriate tax is paid on it, thus ensuring her children continue to enjoy well-funded public services and a social safety net.

uknick

The first question is, will your MIL's estate exceed all the IHT nil rate bands her estate will be eligible for? If so leave it as it is.


If not, then you can do some planning. But, don't forget the implication of other taxes such as CGT. This will be applicable to the MIL if she transfers the property (it will be deemed to be at market value by HMRC) and also to the children if they go on to sell it. The CGT may exceed any IHT due on her estate.


With regard to your suggestion about the rent, as the parties are related in what HMRC may consider to be an IHT avoidance scheme, the property might still be construed as a gift with reservation. Especially if the MIL is paying income tax at present on the rental income. However, some of the contributors on here will have better experience of how HMRC think about matters like this.

Keep_pedalling

First off she needs to establish if her estate actually falls into IHT territory. What is the current value of her estate and what is her marital status?

It sounds like she has few liquid assets, so she should also be aware that if her rental property has significantly increased in value since she acquired it, then she is going to be facing a capital gains tax bill on disposal of the property.

She should also be concerned at what happens to her income if one of her children runs into financial difficulty, dies before her, or gets involved in a expensive diviorce.

uknick

Wayne_O_Mac wrote: »

By ensuring the appropriate tax is paid on it, thus ensuring her children continue to enjoy well-funded public services and a social safety net.

The appropriate tax paid is that which is legally required to be paid. Legal tax avoidance schemes should not be looked upon as a way of short changing the public. Most of us take advantage of them when we can. Do you have, or ever had, any ISAs for instance?

xylophone

Does she have the cash to pay what may be a substantial CGT bill on transfer?

In reality, (because of the implied condition of the transfer) this is a gift with reservation of benefit - whether eventually HMRC would pick this up and challenge who knows?

If ever the mother required to go into care and the sale of her own property and other assets did not cover the bills, the LA might well look back and see this arrangement as an attempt at deprivation of assets to acquire or increase entitlement to benefits.

kidmugsy

Wayne_O_Mac wrote: »

By ensuring the appropriate tax is paid on it, thus ensuring her children continue to enjoy well-funded public services and a social safety net.

Or by ensuring the appropriate tax is paid on it, thus ensuring that someone else's children enjoy spongeing off well-funded public services and a social safety net.

Many things are possible.

badmemory

Well my very basic advise would be - never give away an asset (any asset) if you are likely to need ANY of the benefit of that asset. So if she needs the income from the rent she should not do it. Once given away, despite the offspring's very good intentions, there is no way to ensure she gets any income.

le_loup

kidmugsy wrote: »

thus ensuring that someone else's children enjoy spongeing off well-funded public services and a social safety net.

Interesting point of view - that anyone receiving benefits, medical care, roads, police, etc. are spongers.

agrinnall

youngcouple wrote: »

However as she currently relies on the property's rental income, if she were to gift the house to the children and they continued to rent it out, and if they were to then gift her the rental proceeds (after tax) would this effect the validity of the IHT exemption?

What will she do if her children decide not to gift her the rental proceeds, what will she live on then?

Linton

agrinnall wrote: »

What will she do if her children decide not to gift her the rental proceeds, what will she live on then?

Or one of the children dies or has some financial problems that require the child's assets to be sold.