How to avoid IHT if Labour scraps the residence nil-rate band?

BR5500

My father unexpectedly passed away this year. I moved back in with my parents after university due to ill health. My father left everything to my mother and if I outlive my mother, everything is left to me. My parents' house is worth approx £350k and their other savings/investments/cars are worth approx £180k. As I understand it, my father could pass on £325k + £175k in unused allowances and my mother could also pass on £325k + £175k to me, making a total of £1m. Even if my mother lives another 10 - 15 years, it is highly unlikely her assets will ever exceed £1m.

However, I have read comments on news articles that it is not always easy to qualify for the £1m total allowance (someone said the extra allowances only apply if the property is valued at least £350k and a lot of documentation is required to qualify for the £1m allowance, but I'm not sure if this is true?) I've also read something about "mirror wills" not qualifying for the extra allowances. As far as I am aware, the wills made were standard normal wills, whereby each parent leaves everything to the surviving other and then if I am the final survivor, I inherit everything. 

Most worryingly of all though, I'm very concerned that Labour is considering scrapping the extra allowances for passing on assets to children, the residence nil-rate band.

If the extra £175k allowance, along with the unused allowance from my father is scrapped by Labour, is there anyway of keeping me out of paying any IHT, such as by putting the house into trust? 

It is sadly unlikely that my mother will live another 7 years so even if the house was signed over to me, the 7 year rule would no doubt lead to me paying IHT. I've also heard that if a house is signed over before death, in theory the parent should pay the child rent at market value, which would be subject to income tax.

I fully expected my father to live at least another 10 years, he was by far the healthiest of the 3 of us. I am taking legal action against the NHS due to his completely unnecessary death - as he was in his 70s it is highly unlikely much financial compensation will be awarded (indeed, I'm only pursuing the case to gain justice for my father, no amount of financial compensation will make any difference as my life has been prematurely ruined by the failings of the NHS) but should any compensation be achieved, this would go to my mother and would also be subject to IHT by me should the current extra allowances be scrapped.

Finally, while no one can accurately predict Labour's plans, if they scrap the residence nil rate band, is it likely they will also scrap the unused allowance? In my particular case, even if the nil rate band is scrapped, the standard £325k unused by my father plus the £325k for my mother would mean a total of £650k and this amount is still likely to exceed the total value of the estate for at least a few years, unless house prices rise dramatically in the next few years. 

I'd greatly appreciate any advice regarding the potential scrapping by Labour of the potential £1m allowance to surviving children. If it is scrapped, I would imagine it would affect a large percentage of people as these days, even relatively modest houses are approaching £1m in value. 

Thanking you in advance. 

tasticz

First thing that comes to mind is transfer to your name and buy life assurance for 7+ years in mums name

Keep_pedalling

tasticz said:

First thing that comes to mind is transfer to your name and buy life assurance for 7+ years in mums name

The OP said his mother is unlikely to live 7 years so insurance will either be very expensive or unobtainable. Giving your home away is also a very dumb thing to do.

Emmia

BR5500 said:

My father unexpectedly passed away this year. I moved back in with my parents after university due to ill health. My father left everything to my mother and if I outlive my mother, everything is left to me. My parents' house is worth approx £350k and their other savings/investments/cars are worth approx £180k. As I understand it, my father could pass on £325k + £175k in unused allowances and my mother could also pass on £325k + £175k to me, making a total of £1m. Even if my mother lives another 10 - 15 years, it is highly unlikely her assets will ever exceed £1m.

However, I have read comments on news articles that it is not always easy to qualify for the £1m total allowance (someone said the extra allowances only apply if the property is valued at least £350k and a lot of documentation is required to qualify for the £1m allowance, but I'm not sure if this is true?) I've also read something about "mirror wills" not qualifying for the extra allowances. As far as I am aware, the wills made were standard normal wills, whereby each parent leaves everything to the surviving other and then if I am the final survivor, I inherit everything. 

Most worryingly of all though, I'm very concerned that Labour is considering scrapping the extra allowances for passing on assets to children, the residence nil-rate band.

If the extra £175k allowance, along with the unused allowance from my father is scrapped by Labour, is there anyway of keeping me out of paying any IHT, such as by putting the house into trust? 

It is sadly unlikely that my mother will live another 7 years so even if the house was signed over to me, the 7 year rule would no doubt lead to me paying IHT. I've also heard that if a house is signed over before death, in theory the parent should pay the child rent at market value, which would be subject to income tax.

I fully expected my father to live at least another 10 years, he was by far the healthiest of the 3 of us. I am taking legal action against the NHS due to his completely unnecessary death - as he was in his 70s it is highly unlikely much financial compensation will be awarded (indeed, I'm only pursuing the case to gain justice for my father, no amount of financial compensation will make any difference as my life has been prematurely ruined by the failings of the NHS) but should any compensation be achieved, this would go to my mother and would also be subject to IHT by me should the current extra allowances be scrapped.

Finally, while no one can accurately predict Labour's plans, if they scrap the residence nil rate band, is it likely they will also scrap the unused allowance? In my particular case, even if the nil rate band is scrapped, the standard £325k unused by my father plus the £325k for my mother would mean a total of £650k and this amount is still likely to exceed the total value of the estate for at least a few years, unless house prices rise dramatically in the next few years. 

I'd greatly appreciate any advice regarding the potential scrapping by Labour of the potential £1m allowance to surviving children. If it is scrapped, I would imagine it would affect a large percentage of people as these days, even relatively modest houses are approaching £1m in value. 

Thanking you in advance. 

I think you should not worry about clickbait articles about unannounced tax changes in terms of trying to second guess what the government may or may not do. 

Putting the property into trust, or into your name rather than your mum's has potential downsides. The government could also decide to legislate in a way that would make using trusts more expensive, or which removes some of the benefits of using trusts.

The fact is, even if you end up paying IHT you will still end up with a very tidy sum indeed. 

The rules on IHT currently penalise the childless - I don't have children so I can only pass on £650k, when I might want to pass on the full £1 million to my nieces and nephews, Instead, they'll (or my estate) will have a big bill - if I have that much to leave when the time comes.

If you want to argue that I/the childless should have had kids, that's great, but not everyone can - and indeed some people outlive their children.

Keep_pedalling

It may be possible to use his RNRB now if your parents held their home as tenants in common through a deed of variation passing his share of the house to you so you and your mother became joint owners. This would require a full IHT return to be completed in order to claim the RNRB. If, as is more likely, they held the house as joint tenants then your mother automatically became the sole owner so that won’t be possible.

As it stands your mother’s net worth is well under £650k so a long way from needing either RNRB so this should not be anything to worry about at this time. You certainly should do nothing until the Autumn budget wager we might get an indication on Labour’s plans for IHT.

Brie

If there was a will and the estate hasn't been fully settled would it be possible for mom to have a late alteration to give OP half the property?  Doesn't sound like FTB benefits will be missed and would offer him some security and a lower potential bill should their be any changes by Labour (which frankly I don't think will happen but that's just my guess.)

BR5500

Many thanks for all the replies, I greatly appreciate all the feedback. I am probably being a bit paranoid as the total value of the estate of £530k is relatively low in the great scheme of things and even if the nil rate band is scrapped, as long as my father's unused share is included, I would be well under the £325k x 2, £650k limit.

I definitely won't take any action until the October announcement by Labour. I can imagine that setting up a trust or putting the property into my name now could lead to more problems, not to mention expense which is likely to be unnecessary.

I guess the very worst case scenario would be if Labour scraps the nil rate band and the ability to pass on any unused allowance - if married couples are only allowed to pass on £325k tax free to their children I'd imagine there would be an outcry in the media, much the same as the scrapping of the winter fuel allowance. There has been so much publicity over this, I would not be surprised if Labour U-turn on the winter fuel allowance. In all honesty though, the fuel allowance would barely cover a month's energy bill for many so you would have to be on an extremely tight annual budget for it to make a significant difference. Nonetheless, it seems a very cruel thing to do, given as so much money has been wasted elsewhere.

Sorry to go off topic. After my father's passing, the house was transferred to my mother as the sole owner. My parents were 'tenants in common' on the deeds. I don't think the life assurance option would be possible as my mother has pre-existing health conditions and the severe unexpected stress and shock of prematurely losing my healthy father hasn't helped her health, it has certainly further ruined mine. 

I totally agree about the IHT rules penalising the childless, I don't have children myself and am highly unlikely to have them now so if the rules remain the same, I would only be able to pass on £325k before incurring IHT. I should add of course that £325k is a massive amount of money but it is relatively small in relation in house values. Around here, even first time buyer homes are around £250k so the vast majority of elderly people are more than likely to own a house worth £325k. That's why I can imagine there would be outrage if the maximum limit for all was lowered to £325k. 

Just one further quick question, is I was to receive a gift of £3000 as per the annual limit, would I have to pay income tax on this £3000? So far, I have never received any gifts or inheritance from the parents - I feel that this maybe the best way to have a clear cut approach should I outlive my mother. I can imagine if gifts are mentioned, HMRC are likely to check up on this. Incidentally, my parents and myself have always kept all our bank statements to prove that no lifetime gifts have been made.

Many thanks again for all the help and I fully sympathise with anyone concerned about IHT - if my parents moved to a bigger property as planned 25 years ago, it would now be worth in excess of the £1m limit. I can only imagine the headaches the IHT rules must cause relatively normal income families. I'm sure that IHT was initially introduced to only affect the rich, not normal families who have been careful with their money. My parents only have savings because they lived extremely frugally, certainly far more frugally than anyone else I have ever met! Ironically, the rich never pay IHT as they have the means to avoid it.

Bookworm105

there is no income tax on a gift of money 

as for IHT, I inherited and paid IHT on a much smaller amount (before unused transfer became a thing) than you will get, so don't lose sight of the fact you will still be well provided for 

BR5500

Many thanks Bookworm105, would it have to be declared on my annual Self Assessment tax return or would it simply not be included on the return?

Also, am I correct in stating the first gift can be £6k as it is possible to back date this one year? Not that I'm intending to suggest this to my mother, but in the unlikely event that Labour put me into paying IHT, the gifts would be a few thousand safe from any IHT.

Albermarle

BR5500 said:

Many thanks for all the replies, I greatly appreciate all the feedback. I am probably being a bit paranoid as the total value of the estate of £530k is relatively low in the great scheme of things and even if the nil rate band is scrapped, as long as my father's unused share is included, I would be well under the £325k x 2, £650k limit.

I definitely won't take any action until the October announcement by Labour. I can imagine that setting up a trust or putting the property into my name now could lead to more problems, not to mention expense which is likely to be unnecessary.

I guess the very worst case scenario would be if Labour scraps the nil rate band and the ability to pass on any unused allowance - if married couples are only allowed to pass on £325k tax free to their children I'd imagine there would be an outcry in the media, much the same as the scrapping of the winter fuel allowance. There has been so much publicity over this, I would not be surprised if Labour U-turn on the winter fuel allowance. In all honesty though, the fuel allowance would barely cover a month's energy bill for many so you would have to be on an extremely tight annual budget for it to make a significant difference. Nonetheless, it seems a very cruel thing to do, given as so much money has been wasted elsewhere.

Sorry to go off topic. After my father's passing, the house was transferred to my mother as the sole owner. My parents were 'tenants in common' on the deeds. I don't think the life assurance option would be possible as my mother has pre-existing health conditions and the severe unexpected stress and shock of prematurely losing my healthy father hasn't helped her health, it has certainly further ruined mine. 

I totally agree about the IHT rules penalising the childless, I don't have children myself and am highly unlikely to have them now so if the rules remain the same, I would only be able to pass on £325k before incurring IHT. I should add of course that £325k is a massive amount of money but it is relatively small in relation in house values. Around here, even first time buyer homes are around £250k so the vast majority of elderly people are more than likely to own a house worth £325k. That's why I can imagine there would be outrage if the maximum limit for all was lowered to £325k. 

Just one further quick question, is I was to receive a gift of £3000 as per the annual limit, would I have to pay income tax on this £3000? So far, I have never received any gifts or inheritance from the parents - I feel that this maybe the best way to have a clear cut approach should I outlive my mother. I can imagine if gifts are mentioned, HMRC are likely to check up on this. Incidentally, my parents and myself have always kept all our bank statements to prove that no lifetime gifts have been made.

Many thanks again for all the help and I fully sympathise with anyone concerned about IHT - if my parents moved to a bigger property as planned 25 years ago, it would now be worth in excess of the £1m limit. I can only imagine the headaches the IHT rules must cause relatively normal income families. I'm sure that IHT was initially introduced to only affect the rich, not normal families who have been careful with their money. My parents only have savings because they lived extremely frugally, certainly far more frugally than anyone else I have ever met! Ironically, the rich never pay IHT as they have the means to avoid it.

The forum is not really for guesswork on the Governments intentions, based on speculative tittle tattle in parts of the media. Or for comments on the rights and wrongs of IHT. Note  the forum rules -We'd like to remind Forumites to please avoid political debate on the Forum. This is to keep it a safe and useful space for MoneySaving discussions. Threads that are - or become - political in nature may be removed in line with the Forum’s rules. Thank you for your understanding.
However regarding IHT changes , it seems more likely that certain perceived loopholes are closed, that will mainly affect more wealthy people, than any basic change to the parts you have mentioned. 

lm1981

I am in very similar situation to the OP and I have been following the news on this with a lot of attention.