Inheritance tax situation - advise needed :)

Keep_pedalling

qprjames said:

Grumpy_chap said:

Your mother needs money to live on.  She can't eat the house.  You don't mention whether she has a good pension.

She has a 40,000 pension each year (with cpi increase). sorry I should of mentioned this. so luckily she won't need to eat the house!!

And yes this would be a 'verbal agreement'. Nothing is to be put in writing. People might frown at that, but a verbal agreement is as good as a written agreement as far as our family is concerned.

She really should take professional advice to look at things like gifts from excess income, not some dodgy verbal agreement than from the outside looks like a crude attempt at tax fraud. 

Grumpy_chap

qprjames said:

......I should also note that she lives a very frugal lifestyle. this is out of choice. It would be very very unlikely that she would ever need to draw on the 300,000.

Should she need nursing home care and need to self-fund it (which she will under the current rules), the with rates at around £1,500 per week, the pension at £40k will not cover it and equity from the house will not cover it until such time as the sale proceeds can be made available.  At that point your mother will need to draw on the £300k.

It clearly looks like a "gift with reservation" (IHT purposes) and / or "deprivation of assets" (social care purposes).  You specifically say "verbal agreement is as good as a written agreement " so it would seem better to do and record the agreement formally and that covers future eventualities that may not be envisaged now.

Your MOTHER should get some independent financial advice with the focus being on HER needs and wishes.  Unfortunately, children who stand to gain to a substantial amount cannot be fully independent in this situation.

xylophone

Clearly not a PET,
a gift with reservation. 

I am looking at the situation as it would  stand in the eyes of HMRC.

Remember that there will be no evidence of a GWR.

The gift of £300,000 would have been made and (from what the OP says),  either saved or invested in the names of the three offspring.

Legally it would be theirs - the fact that they each regarded the money as "earmarked for Mum in case of need" is irrelevant to the IHT situation that would arise in my scenario as set out above - it would work out that IHT would be payable on the gift if mother died within seven years of making it - so nothing gained.

After the seven years, the gift would be exempt.

Of course by that time,  just the value of the property might be high enough to attract IHT - the heirs ( and presumably executors) would do well to consider that at least some IHT would need paying before grant of probate.

xylophone

or "deprivation of assets" (social care purposes).  

When the mother has a property valued in excess of £1m and an index linked pension of £40,000 per annum (plus presumably state pension either in payment or anticipated), I think it would be difficult to show DoA.

The £300,000 in question is also said to be a share portfolio so it seems likely that mother has cash savings as well.

There would be a need to show that the disposal of the asset was a deliberate attempt to obtain or increase means tested benefits.

Grumpy_chap

Thanks @xylophone

I still think that the best thing is for the MOTHER to take independent financial advice for HER situation and not rely on the advice of her children ( who potentially stand to make a substantial gain ).

If this is a PET and not GWR (not that we necessarily agree on that), but the children are going to hold on to the funds in liquid state "in case Mum needs to call on it", then this could impact the children if any of the three ever needed to claim UC or other means-tested benefits. 
How will Mum and the other siblings react if one of the three falls on hard times and that £100k share is consumed because the sibling fell on hard times and needed survival money in the absence of benefits? 
Would mother and other siblings restrict that rate of consumption to rate of benefits that would otherwise be received?  I am not sure on the benefits rules but I could see that a GWR might be excluded from assets in UC assessment as it is not available for the child to draw down. 
Even excluding hard times and UC claims, there could be standard life events that mean the money held in the bank (or the income generated) impacts benefits entitlement, such as child benefit or grand-children's student finance.
I am certain, the same money cannot be a GWR if benefits claim is needed but PET for HMRC IHT purposes at the same time.

So, lots of complexities and scenarios that could arise.  It seems the children have advised the mother that she can pass this money now (as PET) to avoid IHT but also trying to promise the mother they will, for all practical purposes, treat the funds as GWR.  It is not as straightforward to "square this circle" and we are back to the MOTHER needing HER own independent and professional advice.  She is fortunate to have a sufficiently large estate and pension as to be in a position to benefit from such advice.

xylophone

I still think that the best thing is for the MOTHER to take independent financial advice for HER situation 

I wouldn't disagree -  my posts were comments on the situation as presented by the OP.

With regard to the money, regardless of what the siblings may have  whispered to each other or to mother, in the absence of evidence of any documented legal agreement that the money was intended to be held in trust for mother, in the eyes of HMRC the transfer of the portfolio (or its sale value) to the offspring would be a gift and a PET.

This does mean that the siblings can each do exactly as they please with the cash and yes, in the event that they needed means tested benefits, the cash would be taken into account as theirs.

They would be in exactly the position as with HMRC,  that is, no documentary evidence that the money was anything other than a gift.

 When you come to think about it, there is nothing to prevent any recipient of a gift from a parent or granny or Auntie Mabel taking the view that he would accept with a good grace (because the donor was anxious to give) but would hold the cash in reserve just in case the relative fell on hard times.

Of course, if he did give it back, then he himself would become a donor and need to consider the effect of the gift on his own estate........

qprjames

getmore4less said:

Should get proper tax planning advice rather than an attempt at DIY tax evasion with fake gifts. 

The house is likely to become an IHT issue if allready around £1m

Why is this a fake gift? it would be 'early inheritance'
It is tax avoidance not tax evasion?
the plan would be for the 300k to clear any inheritance tax in 7 years time, assuming my mum would live for another 20 years (she's 70 right now).  why not get the clock ticking now instead of in 10 years time?

xylophone

Your mother can make the gift if she chooses.
Read comments and links in my other posts.

Grumpy_chap

qprjames said:

Why is this a fake gift? it would be 'early inheritance'
the plan would be for the 300k to clear any inheritance tax in 7 years time

It is a fake gift because, as per your OP, you "would make it a verbal condition amongst the family members that this money would be on hand, in the unlikely event she ever needs it back straight away"

If your mother gifts you the money without condition or reservations, then it becomes PET and clears IHT after the 7 years have passed.

If your mother gifts you the money with the reservation or understanding that the money will be there to support her if she needs it, then it is a GWR and will not be excluded from her estate for IHT purposes.

The only correct way to proceed is that your mother takes independent advice for her situation.

Each of the children should also take independent advice for their situation.  It is important to understand the impact on your own finances of having a large sum of money that appears to be yours but is being held incase your mother needs it.  The sum of £100k each can reasonable be expected to generate some income and this could affect thresholds for child benefit, student finance for your children etc.  In the event of hard times meaning that any of the children need to call upon UC or other benefits, then having this money in the bank will reduce or cancel the benefits receivable (unless it is a GWR which it would be logical could be excluded, though I do not know).  You may feel that the financial position of each of the children is sufficiently resilient to mean you would never need UC or benefits, but that cannot be guaranteed - there are many finding that out this year when the totally unexpected has happened.  How would you as a family (three children plus mother) manage that if the mother did need the money back for any reason, but only 2/3rd is available because child 3 spent it all?

getmore4less

With a total disregard for GWR they probably have not bothered looking at potential preowned asset interactions.