Best way to cut inheritance tax without gifting?

tommydog40

Jeremy535897 said:

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.

I am not sure it would be that difficult.  I have seen garages for sale, driveways, shared occupancy etc.  I am pretty sure something could be drafted.  There was a guy I used to know at uni who's parents gave him the garage to convert into a dwelling.  The difference in my situation is nothing would be gifted, but I would buy it from her at the market rate.  There is no reservation of benefit, as I would be buying something at the market rate and there would be an actual transfer of my hard earned cash. If this negatively impacts the price of the house, it's not my problem.  If I wanted to purchase the garage, driveway and garden from my mother at market rates and she is in agreement, who is to say I can't do that?  Yes it will massively reduce the price of the house, but that's not my problem.  It would be a commercial transaction using my hard earned cash. 

Jeremy535897

A separate garage is a different proposition to your earlier suggestion of a room inside a house. For inheritance tax, it is still the diminution in value that is used, so there would be a gift at the date you bought it. The net effect would be that if she died within seven years of that gift, there would be little impact on the inheritance tax liability (the foregone increase in value from the date of the gift). There are also gift with reservation risks. It may well be that the council have more difficulty showing a deprivation of assets, but it seems very unlikely that she would ever be in a position to need their support (and she would still own the main house).

tommydog40

Jeremy535897 said:

For inheritance tax, it is still the diminution in value that is used, so there would be a gift at the date you bought it. 

If you are correct that despite buying it at market rates, the diminution in value of the rest of the property would constitute a gift, that does not seem to be a problem if I intended to live with her.  It's all academic as I don't intend to live with her, but this interesting reading is from a solicitors website:

'If you give half of your home to your children, who then move in, the half that you have given away won’t be treated as part of the estate for inheritance tax purposes.  This is as long as you live for seven years after making the gift.'

This is my other idea.  What would happen if my mother changed her will to give my partner (we are not married and don't live together) the driveway, garage and garden upon my mothers death.  I would then be left with the house, which would be greatly diminished in value, due to another party owning the driveway, garage and garden.  Surely this would help the inheritance tax position with regards to the house? 

theoretica

tommydog40 said:

This is my other idea.  What would happen if my mother changed her will to give my partner (we are not married and don't live together) the driveway, garage and garden upon my mothers death.  I would then be left with the house, which would be greatly diminished in value, due to another party owning the driveway, garage and garden.  Surely this would help the inheritance tax position with regards to the house? 

Again, no.  There's a theme here.  Inheritance tax is due on the value at the time the person dies.  If her will left instructions that the house be burnt down, the inheritance tax would still be due on the building as it was when she died and not the burnt out shell.

tommydog40

theoretica said:

tommydog40 said:

This is my other idea.  What would happen if my mother changed her will to give my partner (we are not married and don't live together) the driveway, garage and garden upon my mothers death.  I would then be left with the house, which would be greatly diminished in value, due to another party owning the driveway, garage and garden.  Surely this would help the inheritance tax position with regards to the house? 

Again, no.  There's a theme here.  Inheritance tax is due on the value at the time the person dies.  If her will left instructions that the house be burnt down, the inheritance tax would still be due on the building as it was when she died and not the burnt out shell.

So I would have to pay inheritance tax based on the total value of the whole property, even though I will personally only benefit from a proportion of the property? 

theoretica

tommydog40 said:

theoretica said:

tommydog40 said:

This is my other idea.  What would happen if my mother changed her will to give my partner (we are not married and don't live together) the driveway, garage and garden upon my mothers death.  I would then be left with the house, which would be greatly diminished in value, due to another party owning the driveway, garage and garden.  Surely this would help the inheritance tax position with regards to the house? 

Again, no.  There's a theme here.  Inheritance tax is due on the value at the time the person dies.  If her will left instructions that the house be burnt down, the inheritance tax would still be due on the building as it was when she died and not the burnt out shell.

So I would have to pay inheritance tax based on the total value of the whole property, even though I will personally only benefit from a proportion of the property? 

You do not pay inheritance tax on what you inherit - the estate pays inheritance tax on what the person leaves - usually deducted from the portion of whoever is the residual beneficiary - which happens to be you.  So yes, you (as residual beneficiary) will have all the inheritance tax reducing what you inherit, regardless of who it is left to.

Jeremy535897

theoretica said:

tommydog40 said:

theoretica said:

tommydog40 said:

This is my other idea.  What would happen if my mother changed her will to give my partner (we are not married and don't live together) the driveway, garage and garden upon my mothers death.  I would then be left with the house, which would be greatly diminished in value, due to another party owning the driveway, garage and garden.  Surely this would help the inheritance tax position with regards to the house? 

Again, no.  There's a theme here.  Inheritance tax is due on the value at the time the person dies.  If her will left instructions that the house be burnt down, the inheritance tax would still be due on the building as it was when she died and not the burnt out shell.

So I would have to pay inheritance tax based on the total value of the whole property, even though I will personally only benefit from a proportion of the property? 

You do not pay inheritance tax on what you inherit - the estate pays inheritance tax on what the person leaves - usually deducted from the portion of whoever is the residual beneficiary - which happens to be you.  So yes, you (as residual beneficiary) will have all the inheritance tax reducing what you inherit, regardless of who it is left to.

It depends on the will, which can be written to allocate the inheritance tax to specific bequests if so desired. This does not change the amount paid, just who effectively pays it.

tommydog40

Jeremy535897 said:

It depends on the will, which can be written to allocate the inheritance tax to specific bequests if so desired. This does not change the amount paid, just who effectively pays it.

I guess it's to stop families with a few children diminishing the estate for the purposes of inheritance tax.

What I am struggling to get my head around is that inheritance tax won't come into play if a parent gifts their child their house and continues to live in it, so longs as they pay their child rent at market rates. But if a child buys a section of their parents property at market rates  e.g. a garage that the child uses for storage and the parent cannot utilise the space in anyway (it could even have a locked door), then the diminution in value of the family home caused by the garage being sold off will be classed as a "gift" for inheritance tax purposes.  What about if my partner (who is not subject to the will) were to buy the garage at market rates? 

People sell off garages, gardens etc all the time, which inevitably will reduce the price of a property.  Take the garden for instance, as without planning permission / road access it is worth relatively little, but if sold has the potential to greatly reduce the price of the house.  Come to think of it, I think there is an old lady near my mother who did actually sell a large part of her garden to a neighbour for relatively cheap.  I don't think its a crackpot idea, as people genuinely do this all the time, thus negatively impacting the value of their estate.

Jeremy535897

tommydog40 said:

Jeremy535897 said:

It depends on the will, which can be written to allocate the inheritance tax to specific bequests if so desired. This does not change the amount paid, just who effectively pays it.

I guess it's to stop families with a few children diminishing the estate for the purposes of inheritance tax.

What I am struggling to get my head around is that inheritance tax won't come into play if a parent gifts their child their house and continues to live in it, so longs as they pay their child rent at market rates. But if a child buys a section of their parents property at market rates  e.g. a garage that the child uses for storage and the parent cannot utilise the space in anyway (it could even have a locked door), then the diminution in value of the family home caused by the garage being sold off will be classed as a "gift" for inheritance tax purposes.  What about if my partner (who is not subject to the will) were to buy the garage at market rates? 

People sell off garages, gardens etc all the time, which inevitably will reduce the price of a property.  Take the garden for instance, as without planning permission it is worth relatively little, but if sold has the potential to greatly reduce the price of the house.  Come to think of it, I think there is an old lady near my mother who did actually sell a large part of her garden to a neighbour for relatively cheap.  I don't think its a crackpot idea, as people genuinely do this all the time, thus negatively impacting the value of their estate.

There has to be a transfer of value (calculated as a diminution in someone's estate), and an intent to benefit a donee (rather than a bad bargain). What exposes this sort of thing is that the transferor would only do it in favour of someone they would want to benefit.

You seem to be confusing various issues. If a parent gives a house to a child, that is a transfer of value equal to the value of the property. If a parent rents a property to a child at the same rent they could get from a third party, there is no actual transfer of value, as the parent retains the property (the impact of letting the property out, at a market rent on a monthly assured tenancy on the value, would be trivial anyway), and the child has received no gift.