Property Trusts to avoid Inheritance Tax

angrysharks

A friend's mum received a substantial medical negligence payout so she bought her three adult children a house each. All of the properties are still in mum's name as a couple of her children claim state benefits (have young families). Mum and dad are in their 60s and live in their own house nearby. They want to find a way to use a Property Trust so ownership of each child's house transfers to them when mum dies. This would all incur a lot of Inheritance Tax so a Property Trust was suggested but they don't know where to start. Any tips and ideas? Thank you.

Olinda99

the bottom line is at although some of these trusts are promoted as a way to avoid inheritance tax they rarely work - otherwise everyone would do it !

inheritance tax will be payable on anything in your mother's estate over five hundred thousand (or one million if she inherited her husband's allowance) at the rate of 40%

theoretica

Inheritance tax is not due on a gift which was more than seven years before the donor's death - so thinking about transferring each property at a good time would be worth considering.  Are the benefits ones which would be reduced if the children were home owners, or is their home excluded from consideration? 

sevenhills

Could the houses be kept in a ltd company?

Personally, I think they should be given to the children, owning your own home doesn't affect most benefits.

Keep_pedalling

Owning a house outright rather than living rent free in a house owned by someone else will make no difference to someone’s benefits.

Trusts are complex and can be subject to hefty taxation so should be avoided. If the purchases were made some time ago then there is the issue of capital gains tax. If the properties are worth more than they were purchased for then the gain is taxable if the properties are sold, transferred to a trust or given to a connected person.

Another issue here could be deliberate deprivation of assets. If you friend needs care and has no assets other than her home after giving away her award then the LA are likely to treat this as such. 

Trying to avoid IHT by creating a trust or giving away three houses could actually backfire horrible if she died within 7 years of making the gifts as in the following example.

Jack & Jill own a house worth £350k they have £50k in savings and after Jill came into some money she bought their 3 children a £200k house each.

Jill dies a year later and the £600k in gifts exceed her NRB by £275k resulting in an IHT liability of £110, and insufficient liquid assets to pay it, so Jack takes equity release on his home to cover the bill. There would be no IHT to pay on Jack’s death as his net worth will be well below his exemptions.

If on the other hand like your friend she purchased them in her own name, and left everything to her husband there would be no IHT as it is covered by spousal exemption. If Jack died shortly afterwards his estate could not only claim his own NRB and residential NRB it could claim Jill’s unused exemptions. If the property values and savings had not gone above £1M in the meantime then his whole estate would be exempt from IHT.  

Marcon

angrysharks said:

A friend's mum received a substantial medical negligence payout so she bought her three adult children a house each. All of the properties are still in mum's name as a couple of her children claim state benefits (have young families). Mum and dad are in their 60s and live in their own house nearby. They want to find a way to use a Property Trust so ownership of each child's house transfers to them when mum dies. This would all incur a lot of Inheritance Tax so a Property Trust was suggested but they don't know where to start. Any tips and ideas? Thank you.

Yes; a good solicitor. I think you're over-estimating what this sort of forum can offer - and of course nobody is insured if their post is hopelessly wrong but you still act on it!