Heartfelt request for IHT and retirement planning

Dear
My wife and I own our home as tenants in common. Valued at approx. 600K. Purchased price was 180K.

My full state pension started last year and my wife's will start soon, bringing in a total of ~ 20K.
We also receive rent on a commercial property + flat above at a total of ~ 40K (Gross). 
This whole property is valued at ~ £1m. Both properties are owned freehold as tenants in common and the mortgages have been paid. We have no private pension, other source of income or significant share holdings etc. 

We use to live (and work) at the £1m property in the 60s-80s before moving into the current property after my parents passed away. My wife and I suffered a horrific accident in 2000 which left us in bad shape. We dug into savings and borrowed from friends/family during 2000 - 2015 as rent was not coming in regularly (unstable tenants) and we had a lot of hospital trips to make. We are better now (all things considered). My boy has been really great; doing everything for us during our bad times and now, going beyond the expectation we had from him. 

Whenever I talk to the lad about inheritance and future planning, he shrugs his shoulders and says the decision should be left entirely to my wife and I  He works hard but just about makes ends meet. He and his wife (no children) live with us. My wife and I do some voluntary work and a friend of a friend gave us the details of an 'advisor'. This confident, likable gentlemen talked about setting up trusts, tenants in common, wills and LPAs, and it all sounded very well. He set-up the LPAs as promised, so we had trust in him. He asked for a 'deposit' before we met again and we haven't seen him since he took £1500 from us :( That was a while ago. 

I write this with a heavy heart as a request for your help in terms of future planning/IHT assistance.

** How would you progress forward? **

I just draw a blank mind thinking about it all, and, even as I write this, emotion takes over,  We also have a wonderful daughter who is married and living with her husband in their home (no children).

The only thing I can think of is gifting the current property we all live in to my son whilst continuing to all live together, that way I believe he doesn't pay any IHT so long as we stay alive for 7 years. I think that means the rent (~40k) officially would count as his and his wife's income, thus tipping them into the higher tax bracket. However, they could put more of their salary into their pensions to avoid this? But, the question of the commercial property/flat still lingers. Possibly this could be left to the surviving spouse and he/she can use both sets of IHT allowances and leave to the kids 50:50 in the future...

Thanks in advance for your take on going forward.
  
  


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Comments

  • Assuming your joint net worth is around £1.6M ( you don’t mention any savings) on the second death there would be a considerable IHT liability but £1M would be tax free and the rest would be taxed at 40% which would mean your children get £1.36M and HMRC get £240k, so they would still be pretty well set up with no IHT mitigation. 

    With virtually all you wealth tied up in property it is very difficult to actually mitigate it. Gifting a share of the commercial property would be difficult because that would almost certainly mean you would face a capital gains tax liability, and I can’t see how trusts would be of any help apart from earning that ‘nice’ gentleman a fat fee. Gifting your home is a non starter as the 7 year rule does not apply if you are going to continue to live there. As he lives with you could gift him a share of your home but that complicates things if he has plans to eventually get a place of his own.

    We are in a similar position with regard to IHT and also have two children but we are quite happy with that situation so are not taking any drastic action to change that although we do gift enough to stop the estate growing, which is something you might like to consider if you have excess income coming in. 

    See a local solicitor about making wills do not use a will writing company.
  • Savvy_Sue
    Savvy_Sue Posts: 45,823
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    Also if any of you, wife, children and spouses do not have LPAs in place, do that too - you already know how easy it is for life to be disrupted.
    Signature removed for peace of mind
  • RAS
    RAS Posts: 32,462
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    And do the LPAs yourself, on-line. Costs £80 ish for each.
    The person who has not made a mistake, has made nothing
  • Firstly you need to consult a STEP solicitor or possibly an STEP accountant who will not rip you off but quite rightly will cost for their expertise. https://www.step.org/about-step/public

    IANAL but one aspect you could look at is if the commercial property can be placed in a limited company. There are rules around this and an accountant can advise the pros and cons including CGT and IHT liabilities.

    With an estate that size it is worth paying to get professional advice. 
  • thegreenone
    thegreenone Posts: 958
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    edited 18 October 2023 at 3:27PM
    Sell the commercial property and divide by three:  one third to you, your son and your daughter.  This should bring you in under the IHT threshold and set your children up in their own, hopefully, mortgage free homes.  If you save/invest your third, you and your wife should have around £37k when your wife claims her SP.  That's generally regarded as plenty to live on.  It should also cut your tax bill if you keep you and your wife's income under £20k each.

    Change your home to Joint Tenants.  When one of you passes it will be an easy switch to the other.  When you both go, hopefully you will be under the threshold and it will be split 50/50 between your children.  You have LPA but do you have Wills?

    If you gift your home to your son, to continue to live in it you will need to pay him rent.  If you and he fall out, he can evict you both.  Not a good idea.  The rent from the Commercial unit would not automatically become sons. 

    You really need some professional help - not a friend of a friend.
  • Keep_pedalling
    Keep_pedalling Posts: 16,218
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    Sell the commercial property and divide by three:  one third to you, your son and your daughter.  This should bring you in under the IHT threshold and set your children up in their own, hopefully, mortgage free homes.  If you save/invest your third, you and your wife should have around £37k when your wife claims her SP.  That's generally regarded as plenty to live on.  It should also cut your tax bill if you keep you and your wife's income under £20k each.

    But the OP would lose the income and would have a CGT liability to settle, and if they did not survive 7 years it would still be subject to IHT

    Change your home to Joint Tenants.  When one of you passes it will be an easy switch to the other.  When you both go, hopefully you will be under the threshold and it will be split 50/50 between your children.  You have LPA but do you have Wills?

    That won’t avoid any IHT

    If you gift your home to your son, to continue to live in it you will need to pay him rent.  If you and he fall out, he can evict you both.  Not a good idea.  The rent from the Commercial unit would not automatically become sons. 

    Not if the son and his partner continues to live with them. They could gift half the house to their son and it would not count as a gift with reservation nor be liable to CGT when sold. It does however complicate things if he want to move to his own place, goes bankrupt or gets divorced. 
  • Sell the commercial property and divide by three:  one third to you, your son and your daughter.  This should bring you in under the IHT threshold and set your children up in their own, hopefully, mortgage free homes.  If you save/invest your third, you and your wife should have around £37k when your wife claims her SP.  That's generally regarded as plenty to live on.  It should also cut your tax bill if you keep you and your wife's income under £20k each.

    But the OP would lose the income and would have a CGT liability to settle, and if they did not survive 7 years it would still be subject to IHT

    Yes CGT and potentially IHT if they survive 7 years (which sounds as though they will) but when Mrs OP gets her SP and they live on the interest from their 1/3rd investment they can stay in the 20% tax bracket and still enjoy a healthy income.  Rather than a higher rate tax bill on a £60k income.

    Change your home to Joint Tenants.  When one of you passes it will be an easy switch to the other.  When you both go, hopefully you will be under the threshold and it will be split 50/50 between your children.  You have LPA but do you have Wills?

    That won’t avoid any IHT 
    Why?  If house is worth 600k and their share from sale of commercial property is £300K+ they should still be under the IHT threshold.  More so, if they make further gifts or enjoy their retirement!.


    If you gift your home to your son, to continue to live in it you will need to pay him rent.  If you and he fall out, he can evict you both.  Not a good idea.  The rent from the Commercial unit would not automatically become sons.
  • A big 'thank you' to all who have replied.

    Keep_pedalling said:

    Assuming your joint net worth is around £1.6M ( you don’t mention any savings) on the second death there would be a considerable IHT liability but £1M would be tax free and the rest would be taxed at 40% which would mean your children get £1.36M and HMRC get £240k, so they would still be pretty well set up with no IHT mitigation. 


    - Stupid question. It could take months if not longer for the kids to sell the property(s). Is there a time limit on when they have to fork out the 240K to HMRC? They would obviously not have that kind of money ready at hand. 

    As he lives with you could gift him a share of your home but that complicates things if he has plans to eventually get a place of his own.

    - At the moment we are all fine together, however, he has plans to purchase (via mortgage) a BTL in 1-2 years time. He has some experience with this so that's good.

    See a local solicitor about making wills do not use a will writing company.

    - Will do, thanks! My wife is looking up STEP solicitors


    Savvy_Sue said:

    Also if any of you, wife, children and spouses do not have LPAs in place, do that too - you already know how easy it is for life to be disrupted.

     RAS said:

    And do the LPAs yourself, on-line. Costs £80 ish for each. 

    - Thank you, done!


    thegreenone said:

    Sell the commercial property and divide by three:  one third to you, your son and your daughter.  This should bring you in under the IHT threshold …

    - If I sell the property, there will be a massive CGT tax bill for me to pay, which unfortunately, I do not have the funds to pay.


     No falling out with the son or his Mrs as we've been through hell and back with our injuries and the consequences over the last 20 years, and if that didn't break us apart, I am not sure what will. 


  • Keep_pedalling
    Keep_pedalling Posts: 16,218
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    LDJ_1955 said:

    A big 'thank you' to all who have replied.

    Keep_pedalling said:

    Assuming your joint net worth is around £1.6M ( you don’t mention any savings) on the second death there would be a considerable IHT liability but £1M would be tax free and the rest would be taxed at 40% which would mean your children get £1.36M and HMRC get £240k, so they would still be pretty well set up with no IHT mitigation. 


    - Stupid question. It could take months if not longer for the kids to sell the property(s). Is there a time limit on when they have to fork out the 240K to HMRC? They would obviously not have that kind of money ready at hand. 

    Where an estate is made up of largely illiquid assets HMRC allow it to be paid in instalments. This can be spread over10 years so the first payment would be £24k. If there are not enough liquid assets to meet that some the a loan would be required.

    As he lives with you could gift him a share of your home but that complicates things if he has plans to eventually get a place of his own.

    - At the moment we are all fine together, however, he has plans to purchase (via mortgage) a BTL in 1-2 years time. He has some experience with this so that's good.

    In which case it would be unwise to gift him, as that would lose him his first time buyers status, and would be hit with an additional 3% tax on his first purchase. No longer living there would also leave him with a CGT liability when the house is sold.

    See a local solicitor about making wills do not use a will writing company.

    - Will do, thanks! My wife is looking up STEP solicitors


    Savvy_Sue said:

    Also if any of you, wife, children and spouses do not have LPAs in place, do that too - you already know how easy it is for life to be disrupted.

     RAS said:

    And do the LPAs yourself, on-line. Costs £80 ish for each. 

    - Thank you, done!


    thegreenone said:

    Sell the commercial property and divide by three:  one third to you, your son and your daughter.  This should bring you in under the IHT threshold …

    - If I sell the property, there will be a massive CGT tax bill for me to pay, which unfortunately, I do not have the funds to pay.


     No falling out with the son or his Mrs as we've been through hell and back with our injuries and the consequences over the last 20 years, and if that didn't break us apart, I am not sure what will. 


    This is one of the problems of having virtually all your wealth in property, it can’t be put into tax saving wrappers such as pensions or ISAs. If you sold you would have the assets to pay from the proceeds of the sale. At some point in the future you may have to face the issue, if you need to sell in order to fund essential calls on your wealth such as care costs.
  • LDJ_1955 said:

    thegreenone said:

    Sell the commercial property and divide by three:  one third to you, your son and your daughter.  This should bring you in under the IHT threshold …

    - If I sell the property, there will be a massive CGT tax bill for me to pay, which unfortunately, I do not have the funds to pay.

    What's the difference between the CGT you would pay now and the IHT your estate would pay?
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