Another Inheritance Tax Question

Kazaa

Hi All,

My father is the sole owner of a residential house with no mortgage worth around £800k. In his will he has put me down as the only trustee, with a clause that the property cannot be sold until my mother passes away and she can stay there rent free.

Question i have is the follows :--

1) When my father passes away the house will be in my name - Therefore do i need to pay inheritance tax even though i cannot sell it?
2) When my mother passes away (she has no share) then i can sell the property and at this point no inheritance tax should be due as i get 500k boosted allowance from both parents right?

Is my understanding correct? 

Mojisola

If your mother doesn't own the house and won't inherit it (or a share of it) from your father, she can't leave it to you so you won't be able to make use of her allowance.

Has your father taken advice about these plans - it's probably going to cost a lot in inheritance tax.

Keep_pedalling

No, you understanding is somewhat off. On your father’s death the trust becomes the legal owner, and your mother the beneficial owner. It would not be subject to IHT as it is covered by spousal exemption, but it will form part of your mother’s estate so if their total assets exceed £1M there may be an IHT liability on the second death.  

The big question though is why is your father the sole owner of the family home? If this is the only main asset then this is a horribly unfair distribution of assets. If your mother dies first your father will be sitting pretty if he ever needs care because he can afford the best money can buy for many years, but if he dies first she won’t be in the same position unless she has plenty of sole assets herself. 

I would encourage him to make her a joint owner as tenants in common, they can then both leave their share to you with a life interest to the survivor. If he if is an old school misogynist and won’t do this, you can correct this on his death with a deed of variation. 

msb1234

Inheritance Tax rules:

There’s normally no Inheritance Tax to pay if either:

• the value of your estate is below the £325,000 threshold
• you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club

You may still need to report the estate’s value even if it’s below the threshold.

If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren your threshold can increase to £500,000.

You will pay 40% IHT on anything over £500k. You might even have to pay Capital Gains Tax if the house has increased in value from his death to when it is sold. 

Kazaa

No he hasnt taken advice, this is the first time i heard of his will, some reason he told me.

My father has another 2 properties (worth 400k each) which are currently buy to lets which will each be left to my sister and brother. 

It seems like my father needs some advice as otherwise i will be paying a lot of IHT as the executor of the will

Keep_pedalling

The estate pays the tax not the executor personally.

If he died tomorrow based on the current planned distribution of his assets there would be a IHT bill of £190k and that comes out of your siblings share of the estate so you would probably need to sell both to pay the tax bill and distribute the rest to your siblings. That would not be easy with sitting tenants and you have to come up with.

What other assets does he have? What level assets does your mother have?

Kazaa

So the assets he has is as follows :--

1) Main home 800k - Mortgage Free
2) Buy to let 300K - 210k Mortgage
3) Buy to let 300k - 200k Morgage
4) Buy to let 290 - 200k Mortgage

So it seems in total he has £1.08M.

An option seems to be where he can gift me the main home in a gifted trust with a condition i cannot sell until both parents have passed away.

Then all is left is 300k which is covered by the allowance. So seems like a possible option

Keep_pedalling

Kazaa said:

So the assets he has is as follows :--

1) Main home 800k - Mortgage Free
2) Buy to let 300K - 210k Mortgage
3) Buy to let 300k - 200k Morgage
4) Buy to let 290 - 200k Mortgage

So it seems in total he has £1.08M.

An option seems to be where he can gift me the main home in a gifted trust with a condition i cannot sell until both parents have passed away.

Then all is left is 300k which is covered by the allowance. So seems like a possible option

No, that would be a very bad move. Gifting your home and continuing to live in it is classed as a gift with reservation so never drops out of your estate. If he did this you would be facing an immediate IHT bill if he was the first to go and on top of that 

There is exactly zero IHT advantage in him either gifting you property now or leaving the property in trust on his death, so it would be far simpler for him just to leave everything to your mother unless he is concerned abut what might happen if she remarried. If he did this, she could then gift you one or more BTL properties. This would save IHT if she survived a further 7 years. Better still make her a joint owner which will avoid the need for probate on the first death.

The problem with having all your wealth tied up in property is that it is very difficult to reduce your IHT liability 

What about your mother’s assets, does or does your father have everything in his name? If he is a higher rate tax payer he could save a great deal of tax with half the rental income going to his wife instead. 

NlghtOwl

It seems a very uneven split of assets between you and your siblings (I predicate there may be some reason for this).
Funny how some parents with additional properties like the idea of leaving a house to a child but in reality this is problematic and very hard to make an equitable split between children. Get advise, Good luck 

theoretica

Naming properties in wills can turn out very unfortunately if one of the properties is sold before death - and I believe there are complications if the executor decides to sell one to pay IHT.  Who wrote the will (solicitor?) and how long ago - if it is quite old it may reflect outdated tax rules and it is a good idea for them to be looked at every few years to check they aren't leading to possible problems.