New Inheritance Tax threshold for couples

DavidLaGuardia

harryhound wrote: »

How long ago was the Capital Gains Tax relief, for a dependant relative, withdrawn from estates subsequently created ?

The property must have been occupied rent-free and without any other consideration by the relative from before 6th April 1988.

_gav_

Just to throw a spanner into all this excellent advice being given. I know people are looking to save on IHT, but something nobody appears to have mentioned is the fact of what happens if/when the surviving spouse needs to go into a home!? If you have more than £21k of savings/capital then you will pickup the cost of the care, until you have little more than £12k in savings left.

If you have not used your nill-rate band on first death, there is a nice chunky £300K sitting in the surviving spouse's name. If the surviving spouse needs nursing/home care then this will be used as payment towards that care, along with the remaining savings/capital. If it had been given to the children on the first death, it couldn't be used! I imagine if the initiall £300k was in a trust, then it couldn't be touched, so there may still be a need for trusts?!

Just some food for thought really.

localhero

Here's my post from another IHT thread:

Having considered the matter carefully I have reached the following conclusions:-

For those people who have considered/set in motion NRBDT Wills, put your plans on hold. In most cases they won't be appropriate.

The Nil rate band discretionary trust is still suitable in some situations (unmarried couples and those with business assets to name a couple of examples).

Since it is not tax efficient to make gifts upon first death, the easy option is to leave the whole estate to spouse so they receive 2 x the prevailing tax allowance when they die. So if they die in 2010 they can leave £700,000. (What most couples have traditionally done with their Wills in any case.)

But there are couples who still:

1) wish to protect the home from care fees; Or
2) wish to guarantee children from an earlier relationship receive 'their' share of the estate; Or
3) are concerned that surviving spouse will remarry/have more children/run off with the housekeeper/squander the assets

So we know the NRBDT is almost dead, but what of the couples in any of the above situations? (Of which there are many.)

Own the property as tenants in common - but instead of leaving estate to spouse outright, leave them a life interest (ie they can continue living in the property/receive income from your estate). Then on death of surviving spouse your share of estate passes to who you want (rather than leaving things to chance).

Tax-wise this used to cause a problem, not any longer. Much simpler and cheaper to set up, less ongoing legal/taxation issues for the trust and married couples able to double up on the IHT allowances. But most of all it provides certainty.

Therefore married couples (and everybody else for that matter) should still seek appropriate advice so that their wills are written according to their circumstances. Cheap and cheerful mirror Wills will in many cases be suitable, but not always.

jamesd

Tiggs, what return on investment are you using adter a transfer of 300k on the death of the first spouse? How long are you assuming that the second spouse will live? What growth in CGT allowances are you assuming?

That is: when will the return on investment for the recipients exceed their return on investment from leaving the money with the second spouse?

harryhound

localhero wrote: »

Own the property as tenants in common - but instead of leaving estate to spouse outright, leave them a life interest (ie they can continue living in the property/receive income from your estate). Then on death of surviving spouse your share of estate passes to who you want (rather than leaving things to chance).

Tax-wise this used to cause a problem, not any longer. Much simpler and cheaper to set up, less ongoing legal/taxation issues for the trust and married couples able to double up on the IHT allowances. But most of all it provides certainty.

Hi localhero,

So that I think I understand it and to keep the situation simple, let us consider this simplistic example:

House is owned as tenants in common. Husband dies leaving wife "a life interest in half the house and on her death the half a house goes to ......"

Wife dies in 2010. House is worth 1,000,000 (we can all dream or live inside the M25). Assuming there are no other assets (unlikely) the IHT is then 1,000,000 - 700,000 = 300,000 @ 40% = 120,000 Inheritance Tax ?
Is there some relief for deaths within 2 or 3 years of each other ?

Also quite probable: wife cannot manage living in a "G or H" band council tax home, even with the 25% discount. She decides to buy a nice little bungalow with her half and live on the interest from the half that is in the interest in possession trust. Let us pretend that the house was valued for probate at 900,000 when husband died. Now in 2012 it is worth 1,100,000 (ie former husband's half has gone up 100,000). Do the trustees have to pay Capital Gains Tax at 18% on most of their gain? (and get clobbered again with Inheritance Tax if the widow dies in 2013 say) ?

The devil is in the detail.

Harry.

harryhound

localhero wrote: »

Own the property as tenants in common - but instead of leaving estate to spouse outright, leave them a life interest (ie they can continue living in the property/receive income from your estate). Then on death of surviving spouse your share of estate passes to who you want (rather than leaving things to chance).

Tax-wise this used to cause a problem, not any longer. Much simpler and cheaper to set up, less ongoing legal/taxation issues for the trust and married couples able to double up on the IHT allowances. But most of all it provides certainty.

Hi localhero,

So that I think I understand it and to keep the situation simple, let us consider this simplistic example:

House is owned as tenants in common. Husband dies leaving wife "a life interest in half the house and on her death the half a house goes to ......"

Wife dies in 2010. House is worth 1,000,000 (we can all dream or live inside the M25). Assuming there are no other assets (unlikely) the IHT is then 1,000,000 - 700,000 = 300,000 @ 40% = 120,000 Inheritance Tax ?
Is there some relief for deaths within 2 or 3 years of each other ?

Also quite probable: wife cannot manage living in a "G or H" band council tax home, even with the 25% discount. She decides to buy a nice little bungalow with her half and live on the interest from the half that is in the interest in possession trust. Let us pretend that the house was valued for probate at 900,000 when husband died. Now in 2012 it is worth 1,100,000 (ie former husband's half has gone up 100,000). Do the trustees have to pay Capital Gains Tax at 18% on most of their gain? (and get clobbered again with Inheritance Tax if the widow dies in 2013 say) ?

The devil is in the detail.

Harry.

localhero

Hi Harry,

Yes, your calculation is correct assuming spouse 1 has made no other gifts to non exempt beneficiaries in his Will. When second spouse dies (irrespective of how long later) they receive the percentage of the deceased's unused nil rate band in force at second death.

This is quite generous and I can't see how any further relief would be justified.

If there was a life interest for half of the property to go to A & B on second death, then the value of that life interest is simply added to surviving spouse's estate for IHT purposes - which is as before the pre-budget announcement in any case.

For CGT purposes in between 1st and 2nd death any increase in the value of the home would qualify for principal home relief, so neither A & B nor the trustees would have any CGT liability.

If surviving spouse died in 2013 instead of 2010 he/she would be entitled to deduct 2 x NRB at the time from from their estate + value of life interest.

If surviving spouse has sold off £1m property and downsized and made a gift to A & B of let's say £300k and survives 7 years, then there would be no IHT. :T

EdInvestor

_gav_ wrote: »

... what happens if/when the surviving spouse needs to go into a home!? If you have not used your nill-rate band on first death, there is a nice chunky £300K sitting in the surviving spouse's name. If the surviving spouse needs nursing/home care then this will be used as payment towards that care, along with the remaining savings/capital.

Financing care need not actually be as expensive as some people think it is.

https://www.hsbcpensions.co.uk/nhfa/pdfs/is6.pdf

Most people who have estates worth 600k or more are not actually going to want to be at the mercy of the council if they need nursing care anyway.

localhero

Where a life interest of a share of property (or in fact some or whole of the estate) is given to spouse, which passes to A & B on their death then For IHT purposes:

when spouse 1 dies = no IHT (spouse exemption)
when surviving spouse dies = their estate + the value of the life interest given from spouse 1 Less 2 x IHT thresholds.

So in a nutshell A & B will own the asset, but won't be able to take control of it until surviving spouse dies.

chris2fer

sloughflint wrote: »

I think I've understood but to be sure, as I've been unclear about these sorts of wills.
If a will is as Harry described and if I've understood post 90, it is the surviving spouse that has the asset not A&B so spousal tax exemptions apply?
As opposed to A&B co-owning the asset with the proviso that surviving spouse has the right to live there.

Can you just confirm this please, even though under the life interest trust it is classed as the surviving spouse that has the asset not A&B that the surviving spouse could not be forced to use A+B's shares to cover care home fees ??