Inheritance tax - £2m estate

Matty1111

My parents have recently decided it's time to slightly downsize and get their estate planning in order. It is currently comprised of

£1.8m Main residence
£500k Commercial property

Unfortunately they are not big spenders so it's either gift it to us or give it to the tax man. 

The current plan is to sell the main property and buy something slightly smaller for £1.2m, then gift the £400k cash that remains and the £500k commercial property to the children. As I understand it there will be roughly £15k stamp duty and possibly CGT due on the commercial property.

After 7 years the estate is now worth £1.2m with £1m being covered and £200k exposed. 


Does this sound about right?

Am I missing anything obvious here?

p00hsticks

Are the two properties their only assets - no savings, stocks and shares etc ?

Presumably they have more than enough income coming in to meet their day  to day expenditure - otherwise it sound like they're 'asset rich, cash poor' and potentially stuck if they suddenly need to find a sum for e,g, new car, expensive holiday, private hip operation.

Keep_pedalling

Having a £1.2M estate with all of it tied up in your home is not a great position to be in especially if they are going to give up the income they are receiving from the commercial property.

Matty1111

p00hsticks said:

Are the two properties their only assets - no savings, stocks and shares etc ?

Presumably they have more than enough income coming in to meet their day  to day expenditure - otherwise it sound like they're 'asset rich, cash poor' and potentially stuck if they suddenly need to find a sum for e,g, new car, expensive holiday, private hip operation.

Yes just the two properties and 2 public sector pensions. I’m sure they have decent savings but defo no stocks. An expensive holiday would be two weeks in Spain for £3000, they drive a new Kia.

Matty1111

Keep_pedalling said:

Having a £1.2M estate with all of it tied up in your home is not a great position to be in especially if they are going to give up the income they are receiving from the commercial property.

The commercial property is a fairly recent addition. They inherited it a few years ago. I don’t believe they’ve ever spent the income on themselves. Last year my sister got new double glazing and this year my brother a new bathroom.

Point taken though, we’ll need to double check their pensions are adequate going forward.

Grumpy_chap

Matty1111 said:

Yes just the two properties and 2 public sector pensions. I’m sure they have decent savings but defo no stocks. An expensive holiday would be two weeks in Spain for £3000, they drive a new Kia.

The first priority should be to ensure your parents comfort and welfare - they should keep at least enough in cash to meet emergencies.  The second priority should be to ensure the parents full enjoyment of life, so having enough for luxuries, even frivolous extravagance.

Maybe your parents needs to be introduced to the more luxurious life - they have clearly got enough to enjoy more than a fortnight in Spain. 
Perhaps they'd like a first-class and five-star trip to the Caribbean? 
Perhaps they'd like a luxury stay away somewhere really nice in the UK?  Could easily spend over £1k on a weekend break.
Perhaps the parents would like to do some bucket list items?  Northern Belle?  Some adrenalin stuff?  Hot air balloon?

Encourage your parents that their priority should be to enjoy life to the absolute fullest and no longer worry about the cost.  That is a difficult change for your parents to make but no-one should end up like my Dad who would not spend money in his final few weeks because "that was for their future" - at some point everyone needs to realise that their future is now.

As for the assets being passed down to the next generation - do the children want to inherit the commercial property and the responsibilities that carries plus potential taxation for the children?  It may be more appropriate to sell the commercial property and gift the proceeds.  The middle ground is for the parents to gift some of the equity (say arising from the £500k commercial property) and keep the other £400k arising from their house down-sizing.

From the OP, it sounds as though the children are satisfactorily funded (if not rich) as individuals.  If that is the case, and the parents won't spend the money on themselves, then perhaps the children could pay for a super holiday or something for the parents (as milestone anniversary of some kind) from the money that has been passed down early.

It does seem rather sad to me that a couple should work hard and save hard, living frugal lives and then when they have the luxury of time together with mortgage-free house, comfortable pension, and substantial cash equity, they can only then think to give the money away while limiting their own ambition to a budget-conscious fortnight in Spain.  

Spend all the money is the most effective way to avoid future IHT

Flugelhorn

@Grumpy_chap - interesting post, it is easier said than done to spend money when you are just not used to it - we keep trying but get nowhere, not into holidays abroad, fancied a cruise but you have to be vaccinated these days so that's a non-starter. the cars are fine, the kitchen is new... it is not so easy to suddenly spend. 

Mojisola

Flugelhorn said:

@Grumpy_chap - interesting post, it is easier said than done to spend money when you are just not used to it - we keep trying but get nowhere, not into holidays abroad, fancied a cruise but you have to be vaccinated these days so that's a non-starter. the cars are fine, the kitchen is new... it is not so easy to suddenly spend. 

They may feel that spending just to get rid of money is a pretty pointless business.

Keep_pedalling

Unfortunately they missed a trick when inheriting the commercial property, as that could have been passed on through a deed of variation and avoid it every entering their estates. 

diystarter7

Mojisola said:

Flugelhorn said:

@Grumpy_chap - interesting post, it is easier said than done to spend money when you are just not used to it - we keep trying but get nowhere, not into holidays abroad, fancied a cruise but you have to be vaccinated these days so that's a non-starter. the cars are fine, the kitchen is new... it is not so easy to suddenly spend. 

They may feel that spending just to get rid of money is a pretty pointless business.

Older people inc me are set in their ways - to late to splash the money.
Our children say to us go on hols, but never really been a hols person then they say buy a new car etc - what puts me off spending a lot more than we really should is that we both left work early and still years away from state pension but have more than enough coming in and still saving on ave  close to 2k per month. But i often think about how hard we worked and as the income is a lot less I feel pooer.

There is also the fear of not being able to move should we need to etc etc-  people just get set in their ways, my parents are worse then me and their parents worse than them ie more tight as we do not know any family member that has ever rented
annd we all fear losing the house etc so we hold money back a lot of it. Yes, iinflating is eating into it but we and others are set in their ways. Payig 40/50 quid per head for a meal, must be joking, lol.

Grumpy_chap

Flugelhorn said:

@Grumpy_chap - interesting post, it is easier said than done to spend money when you are just not used to it - we keep trying but get nowhere, not into holidays abroad, fancied a cruise but you have to be vaccinated these days so that's a non-starter. the cars are fine, the kitchen is new... it is not so easy to suddenly spend. 

I do totally understand how the change is hard having seen it with my own parents. 

It is a generational thing also, being children of the war and then through post-war austerity "make-do-and-mend" mind-set followed by 1970's three-day-week, but also in many cases, house equity and gold-plated public sector pensions, there is a large cohort of retired with more money than they really ever imagined but still the "thrift" mentality and even one of "not deserving" or thinking that certain things are not for "ordinary people like us".

I saw this with my Dad, who was in hospital aged 86 with liver failure, kidney failure, respiratory failure and erratic heart that would stop every so often for long enough to set the alarms and have the nurses respond.  He clearly had a short while left and he knew that, yet he would not pay for the hospital TV because the costs were "extortionate" and he could not justify wasting savings on something so frivolous as the savings were needed for the "future".  

We now battle to get Mum to spend, but she also faces the same inbuilt challenge.  There are certain things she just does not need - a car being obvious, what 84 year old is going to need a sports car when the barely drive the Honda Jazz they have?
At least the OP's parents seem to accept passing the money on - I was trying to encourage my Mum to gift something to the grandchildren (all nieces and nephews for us as we, sadly, don't have our own) as small amounts of money for them would be life-changing in terms of setting up first home - there was no agreement.

Mojisola said:

They may feel that spending just to get rid of money is a pretty pointless business.

I'm not suggesting spending money to get rid of it.
I'm saying to spend money to make what you would do anyway just a better version of the "same" experience.

As an example, for our first Wedding Anniversary, my wife and I saved up and booked one night in an absolutely awful hotel on the beach - it was bargain-basement cheap £35 including breakfast.  This year, we have booked two nights in a fabulous spa hotel, and the cost is £1,750 plus whatever we spend when we are there.  Ostensibly exactly the same, but a world apart.

Similarly, with the fortnight in Spain that the OP's parents enjoy, £3k is not an outlandish cost - the OP's parents could seemingly choose a more luxurious version of the same trip.  They may not enjoy it, but of they never try it, how will they know?