Passing savings to children to minimise Inheritance Tax

Malthusian

bostonerimus wrote: »

Sure, you will pay your kids rent if they don't live with you, but that is a nice way to further reduce the value of the estate, of course they will pay income tax on the rent.

So not a nice way then, not when it is fairly easy to pass capital to your children with 0% tax applying.

GeorgeDoors wrote: »

People are generally far more concerend about social impacts than tax. In very simple terms if you were to leave £1m to a child via a Will, and that child then divorces, £500k is going to walk out of the family. Had you put that money into a trust, and the trustees then loaned the £1m to the child, who then gets divorced, the money is protected for that child, and subsequent generations of the famly.

It also means the child (and their spouse) might never see a penny if the trustees don't think they deserve it. Who are they preserving it for? A grandchild who statistically will probably also get divorced at some point?

What do the trustees do if the child spends the loaned money or gives it away? Most people want to leave assets to their kids when they die, not debts.

bostonerimus

Malthusian wrote: »

So not a nice way then, not when it is fairly easy to pass capital to your children with 0% tax applying.

Agreed, so the kids could move in and save the tax.....but maybe not their minds.

I think if I was the OP I'd consider downsizing to a house close to the 350k RNBR to free up capital. Then gift enough to bring the total estate down close to 1M and start the 7 year clock. Spending and small gifts could be made to control the size of the estate and if there is a need for long term care there's be 100ks to pay for it.

harrypeters

bostonerimus wrote: »

Agreed, so the kids could move in and save the tax.....but maybe not their minds.

I think if I was the OP I'd consider downsizing to a house close to the 350k RNBR to free up capital. Then gift enough to bring the total estate down close to 1M and start the 7 year clock. Spending and small gifts could be made to control the size of the estate and if there is a need for long term care there's be 100ks to pay for it.

As the OP, the £350k RNRB is effectively £700k (covering the full value of the house) because it's owned jointly with my wife as tenants in common. No need to downsize (and certainly no desire to!).


I'm not worried about the house (at least for IHT purposes - care home fees are another story). It's the other savings that are the 'problem' (though I fully admit it's a nice problem to have) and at least these are easier to give away than property, with fewer complications.

Tom99

harrypeters wrote: »

As the OP, the £350k RNRB is effectively £700k (covering the full value of the house) because it's owned jointly with my wife as tenants in common. No need to downsize (and certainly no desire to!).


I'm not worried about the house (at least for IHT purposes - care home fees are another story). It's the other savings that are the 'problem' (though I fully admit it's a nice problem to have) and at least these are easier to give away than property, with fewer complications.

The RNRB is £175k from April so £350k in total not £700k.

harrypeters

Tom99 wrote: »

The RNRB is £175k from April so £350k in total not £700k.

Of course - my apologies. I should have said that with the £325k basic exemption + RNRB there's a total of £1m for husband and wife.

Keep_pedalling

Gifting the house would be madness.

The RNRB can still be claimed, if you dispose of it to move into sheltered accommodation, residential care or in with a family member. AFAIK it would be lost if you simply gave it away but continued living in it and paid full market rent.

Your children are likely to face a CGT Bill when it is eventually sold.

You could end up being kicked out if one of your children ran into financial difficulty or their share in the house was included in a divorce settlement.

If any of the children does not already own their own home then the gift takes away their first time buyer status.

While you occupy the gift it is pretty much useless to your children as it can’t be spent or invested to meet their needs.

GeorgeDoors

bostonerimus wrote: »

So the gist seems to be that you don't need trusts to save on IHT, but they are useful for controlling capital and the income it generates.

Correct, you just need to gift assets away to potentially save IHT. There are various ways to make those gifts, and specific rules applying to each type of gift, and how those rules interact with eachother in terms of the nature of the gifts made and the order in which they are made.

A direct gift (cheque to child etc) is a PET (Potentially Exempt Transfer) most gifts into trust would be a CLT (Chargeable Lifetime Transfer) both subject to the 7 year inter-vivos period to be effective.

Care and consideration need to be used when planning as to the current gifts that may have been made in the past 7yrs, what gifts might be made going forward (are they PET, CLT or exempt) and consideration needs to be given to the potentail tax position should the person making the gifts die within 7yrs of making them. You could for example be caught by the 14 year rule if you are not careful.

Aside from the potential IHT saving, trusts are a good way to preserve wealth from the many social impacts for future generations (the perpetuity period for trusts is 125yrs currently)

A gift into trust changes the legal ownership immediately, it would be the trustees that hold the assets for the beneficiaries (not advisable for the Settlor or thier spouses to be trustees due to potential issues with Gifts with reservation of benefits rules - GROB) I would advise against Lay Trustees, a Professional Trustee service should be used, its just too technical for Lay people these days, The Trustee Act places great responsibility on trustees, they need to know what they are doing.

The Settlor (person making the gift would typically complete a 'Letter of Wishes' so that the trustees have an understanding of what the Settlors wishes were. A technical point here, a key element of what makes trusts work is that the trustees have 'absolute discretion' on how trust assets are distributed. Its very unlikley that the trustee would go agaisnt Letter of Wishes without a good, justifiable reason.

The are many many benefits of using a Trust and a good adviser will consider them as part of a solution.

GeorgeDoors

bostonerimus wrote: »

I suppose you could put the house in trust and start the 7 year clock which would get the house out of the estate and then maybe the trust would pass the house onto the kids when you die and claim the RNRB, just thinking aloud here without any actual knowledge.

But what is becoming apparent is that the home is a big illiquid part of the estate and if it is worth considerably more than the RNRB it should be high on the list of things to deal with in estate planning. I'd be tempted to downsize to a house that is closer to the value of the RNRB and use gifting to the kids.

You can put almost anything into trust. In my experience most would not put the main family home into trust.

A simplistic overview to cover the RNRB point you make. If a house was in trust at death, it would not currently qualify for RNRB, This is an area where a Deed of Variation may be of use depending on specific circumstances and what the family wanted to do (keep house in trust or make use of RNRB) you have a 2yr window from date of death.

The RNRB is discriminatory, only those thay qualify will benefit. There is legislation on Downsizing, I dont think many will benefit from it but some might.

I think you should look at it in the round. Value of house, all other assets and life expectancy. If a couple are confident they will qualify for the RNRB, and the estimated value of the estate (at life expectancy, not today) is below the available allowances (£1m from 2020) then they may not have to do anything other than review it annually in case something changes.

adonis10

Without wanting to hijack the thread I have a question about RNRB that my wife has been asking me but I've not found a definitive answer.


Her grandmother has assets of circa £850k which includes part ownership of a house (her share is currently worth in the region of £150k at today's MV of the house) and she is trying to help with IHT planning. Her GM lost her spouse 2 years ago and so has taken on his £325k allowance giving her £650k and whatever is available via RNRB. Her will is solely going to her daughter (one of the other part owners of the house - bought in when her spouse died as needs some care which daughter provides) - would this impact the amount of RNRB available? Would it be pro rated because she only owns 1/3 of the house?

Tom99

adonis10 wrote: »

Without wanting to hijack the thread I have a question about RNRB that my wife has been asking me but I've not found a definitive answer.


Her grandmother has assets of circa £850k which includes part ownership of a house (her share is currently worth in the region of £150k at today's MV of the house) and she is trying to help with IHT planning. Her GM lost her spouse 2 years ago and so has taken on his £325k allowance giving her £650k and whatever is available via RNRB. Her will is solely going to her daughter (one of the other part owners of the house - bought in when her spouse died as needs some care which daughter provides) - would this impact the amount of RNRB available? Would it be pro rated because she only owns 1/3 of the house?

No. Assuming the spouse did not use his RNRB then GM would have £350k RNRB from April but it would be limited to the £150k value of GM's interest in the house.
When did she sell the other half to daughter? Not sure if that would count as 'downsizing' if the sale was within the time limits which it looks like it was.