Best way to cut inheritance tax without gifting?

Mojisola

Keep_pedalling said:

If you go back through this long thread, you will see that the OP’s mother is the very definition of a miser. She wants to give nothing away and wants to spend as little as possible.

I think the OP just has to except that HMRC are going to take a good chunk of his inheritance

I wonder if tommydog passed on thanks from the taxpayers for the lump sum her estate is going to pay, she may start to gift some money now - or even spend of her income on herself.

Keep_pedalling

Mojisola said:

Keep_pedalling said:

If you go back through this long thread, you will see that the OP’s mother is the very definition of a miser. She wants to give nothing away and wants to spend as little as possible.

I think the OP just has to except that HMRC are going to take a good chunk of his inheritance

I wonder if tommydog passed on thanks from the taxpayers for the lump sum her estate is going to pay, she may start to gift some money now - or even spend of her income on herself.

I doubt it, for a true miser the whole point of life is to amass money. In the OPs position what I would really be cross about, is that my mother is in a position to live the like of Riley, but chooses to live like a penny-less pauper instead. 

newatc

To Tommydog - There are worst positions to be in. You mother might have strange financial ideas/principles but it is exactly those that are going to give you a good inheritance. 

From what I have read I can't see your mother agreeing to financial advice (which is likely to be costly) so my opinion would be to leave well alone even though gifting you £3k per year would seem to be an obvious move.

macman

Why only £3K per year? She is able to gift maybe £24k for income, plus the allowable capital sum.
It's possible she might be willing to see gifting from income differently to capital-though I rather doubt it, based on what the OP has told us.
All you can do in such situations is present her with the calculations showing the likely IHT bill based on the current arrangements: seeing a bill for several hundred thousand in black and white might just change her mind.

tommydog40

Jeremy535897 said:

Remember that your domicile is only relevant for inheritance tax liabilities on assets you own (when you die). Your mother's worldwide estate is liable to inheritance tax on her death unless she loses her UK domicile.

That's a problem then if you are UK domiciled.  Hypothetically if she were to outright gift the 400k offshore bond, that would be of very little help, unless a trust arrangement was setup.  Canada Life seem claim that inheritance tax can be reduced on these bonds through a trust:

"If your bond isn’t in a trust, there may be inheritance tax to pay when you die. By placing your investment in a trust, there may be less inheritance tax to pay, or none at all." 

Additionally the offshore bond was setup as a life assured with an ex husband who she divorced and has now died. If she were to "gift" it to myself or another person outright (without a trust), that would constitute a chargeable event and incur a large tax penalty.  In addition, If you are UK domiciled, you can only withdraw up to 5% of your original investment each year.  You can do this until you’ve withdrawn 100% of your original investment, upon where you will then incur a tax penalty.  I think these bonds are a good idea if you are non UK domiciled and they have the advantage that there is no tax on the capital growth while they remain offshore. 

Jeremy535897

Such trust arrangements are only feasible if the trust is in place at the start.

tommydog40

Jeremy535897 said:

Such trust arrangements are only feasible if the trust is in place at the start.

I will have to get professional advice on this, but from what you say it seems we are pretty much stuffed with the offshore bond as far as taxes go.  Even outright gifting would make no sense.

In regards to another matter, I was thinking of a hypothetical situation with property.  What would happen if a child were to purchase at the market rate a room within their parents house?  The market rate could be based on the square foot market price of the property.  If the sale went ahead, would it not have the effect of reducing the price of the property? If the property was sold on the open market, who would want to buy a house with a stranger living in it?  It may even make the property unsellable and may mean that costs can't be easily recovered for care home fees and would diminish the value of a property for inheritance tax purposes. 

Keep_pedalling

tommydog40 said:

Jeremy535897 said:

Such trust arrangements are only feasible if the trust is in place at the start.

In regards to another matter, I was thinking of a hypothetical situation with property.  What would happen if a child were to purchase at the market rate a room within their parents house?  The market rate could be based on the square foot market price of the property.  If the sale went ahead, would it not have the effect of reducing the price of the property? If the property was sold on the open market, who would want to buy a house with a stranger living in it?  It may even make the property unsellable and may mean that costs can't be easily recovered for care home fees and would diminish the value of a property for inheritance tax purposes. 

Still keen on the madcap ideas I see. Why would costs be needed to be recovered for care? Your mother has more than ample liquid assets to pay for care, no charge would have to be placed on her house to pay for it.

If you and your mother became joint owners of the property, as soon as she died you would be the sole owner so no issue with it not being worth open market value.

Jeremy535897

Inheritance tax works on the diminution in value of the donor's estate, so in the case of your plan, there would be a gift equal to the value of the property at the date of the gift, less the residual value of the property subject to the gift, less the price paid.

As a practical matter, it would be very difficult to draft the legal documentation to achieve such a transfer, including access rights across the rest of the property. It is also impractical in that one room would be unlikely to have its own sanitary and cooking facilities, requiring a sharing arrangement. I suspect the amount that a third party would pay for such a room would be tiny, but the diminution in value in the estate would be significant. That is of course before any consideration of how to avoid accidentally triggering gift with reservation issues, and there would also be capital gains tax and stamp duty considerations.

An intentional deprivation of assets can be ignored when assessing the value of an individual's estate for assessing contributions for care home fees.

I admire your imagination, but you really need a very good understanding of the legislation before giving it free rein. You have to understand that the government has people very well versed in thinking of all these potential plans who write the legislation, and you are unlikely to outthink them. It's by no means impossible, but you need to be an expert.

tommydog40

Jeremy535897 said:

An intentional deprivation of assets can be ignored when assessing the value of an individual's estate for assessing contributions for care home fees.

But the key word is 'intentional'.  One may do a number of things that may reduce an individual's estate, but if deprivation is not the intent then this will not apply.  Many people make unwise financial decisions which may negatively impact on the value of an estate.  Intent may be quite hard to prove and I should image the tax authorities have bigger fish to fry.  In the grand scheme of things, we are not talking about vast sums of money.