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

BR5500

Grumpy_chap said:

BR5500 said:

Much richer friends' parents have already passed their properties over to their children, in some cases whilst they were in their early 60s. One friend's parents even sold their large residence and moved into a first time buyer's home to avoid IHT! It's always the way, the people who have done this have ended up living into their late 80s and beyond.

I have occasionally wondered what would happen if my mother put her property into joint names now so that my mother and myself are joint owners of the property - I don't know how this would effect future IHT?

There are many reasons why transferring property while the donor remains alive is often unwise.  There are many threads where this is discussed.  This quest to avoid a potential future tax quite often results in a certain current tax and, at the same time, fails to avoid the potential future tax or consideration to meet care costs.

I must confess I haven't looked into this area in any sort of detail before as I didn't think it would ever affect me but I can totally see how transferring property when the donor remains alive is likely to lead to complications. I literally have never received a penny in any sort of cash gifts from the parents and my father's will left 100% of his assets to my mother. I've always thought that this approach is best, given I always expected the estate's value to be well under the married couple's IHT limit (even if the nil rate is excluded!) - hopefully it still will be after the end of October!

Grandst2

If you get hit then so will a lot of people in the public sector and union members, unlikely to happen. I would be more worried about care costs, they're astronomical.

Albermarle

lm1981 said:

Agreed it’s all speculation, I’d be disappointed if they touch the 1m limit for married couples to leave to their children. Before they even consider touching that limit they should go after other IHT loop holes like agriculture relief and such like. 

Some of these loopholes are almost exclusively used by pretty rich people, but a more widespread one is that unused DC pension pots are not included in your estate when calculating IHT liability. Many people who will benefit from this are not even aware of it, although more canny types are deliberately spending other income streams, and conserving their pension funds for this reason.
The IFS has highlighted that the tax regime surrounding death and DC pensions is very generous and has lobbied for change, as it almost exclusively benefits the better off. 
So a change here of some kind is possible, which will for sure drag many more estates into the IHT net, even if the One Million limit stays.

Emmia

Personally I think it is unfair that those with kids can pass on more of their wealth without tax so I'd scrap the additional IHT allowances for that. Or raise it so everyone can pass on up to £500k each (but no extra for people to give to their kids).

Will that happen,  probably not...

MarzipanCrumble

I am one of those who does not draw on their SIPP, hoping that my children can benefit from it.  One is not a high earner and never will be.  The other is a moderate earner in IT, which I think may come to bite him as he gets older.  

Being a baby boomer I appreciate more than I can express a comfortable retirement.  And yes, due to luck, much luck, rather than planning.  And yes, I worked from 18 to 69, but with 5 years out for birth of children/care of same til they could go to nursery - didmy degree during that period (distance).

And yes, I will be liable for IHT.  Have Life Assurance to mitigate that, but it does increase in order to keep the same capital outpay when I die.  Yes, I have given away to my children some of my estate.  But it is a balance between giving and having enough to pay for decent care.......which (may) get more dire as the population ages......

I too think that pension planning scenarios will be hit andmaybe also IHT allowances.  And I sort of agree, tbh.  AsIo said my wealth was absolutely to do with luck, right place, right decisions too, and wealthy parents.  Husband with unusual, volatile job for part of his life but also Defined Benefit pension for other part of his life. 

fuzzzzy

Yes I have been putting a fair chunk into a DC pension that I had planned on not spending until last, if at all. May have to have a rethink now.

I always knew that there was a possibility that the rules on inheriting DC pots might change, and to be honest could see that maybe they should be changed.

It has been disheartening the last couple of weeks reading all the speculative headlines. Then again maybe it will turn out to be a positive thing - maybe it will encourage me to go out and enjoy spending my money whilst I'm still alive.

Albermarle

fuzzzzy said:

Yes I have been putting a fair chunk into a DC pension that I had planned on not spending until last, if at all. May have to have a rethink now. That is possible but maybe we will not know any exact details on Oct 30th. Pensions tax/legislation is complicated and can not be changed that quickly.

I always knew that there was a possibility that the rules on inheriting DC pots might change, and to be honest could see that maybe they should be changed. The rules are very generous ....

It has been disheartening the last couple of weeks reading all the speculative headlines. Then again maybe it will turn out to be a positive thing - maybe it will encourage me to go out and enjoy spending my money whilst I'm still alive.

Regarding the last point, that had crossed my mind as well. I remember another poster saying they enjoyed expensive meals a lot more, knowing that there was effectively a 40% discount on them !

BR5500

That's an excellent point about the public sector and union members also getting hit! In some parts of the public sector, I'd have thought it would be almost impossible to accumulate less than £1m in assets in a lifetime, some heads of councils are earning well in excess of a quarter of that in 12 months! Let's hope we don't see a two tier approach to IHT with exemptions for the public sector! Reminds me of a certain person with a pension that is "tax unregistered!" 

Fortunately or unfortunately, depending on how you look at it, my parents bizarrely didn't really address pensions so their work pensions are peanuts and have no value whatsoever to the surviving spouse or children.

I know it's a relatively small amount but the more I think about it, I guess it does make sense to possibly start the £3k gift each year. I hate the thought of approaching this subject with my mother but should the IHT £1m allowance ever change, at least £3k a year is protected in the meantime. I also understand £6k can be gifted the 1st year, backdating it for one year. I assume my father would not be able to use his share of £3k in this tax year, given he passed in March this year.

In a nutshell though, is there any possible downside to gifting £3k a year? i.e. Does it have to be declared on self-assessment or ignored (a bit like ISA interest) because it is not taxable. Also, should I outlive my mother, when the question is asked have I received any lifetime gifts - do I answer no, as none of the gifts would affect IHT if only £3k a year. If I answer yes, because of the £3k a year, will this lead to further HMRC investigations - not that this would matter if they did as all our bank statements have been kept for decades!

I've also been reading about regular gifts purely from income but I don't think this is worth considering in my case as my mother's total pension and savings interest is way below the minimum wage so I could understand HMRC questioning how on earth she could afford gifting from her limited income - even being very frugal, mum would be lucky to have more than £100 a month excess from her income so it's not worth going down this route.

Albermarle

In a nutshell though, is there any possible downside to gifting £3k a year? i.e. Does it have to be declared on self-assessment or ignored (a bit like ISA interest) because it is not taxable. Also, should I outlive my mother, when the question is asked have I received any lifetime gifts - do I answer no, as none of the gifts would affect IHT if only £3k a year. If I answer yes, because of the £3k a year, will this lead to further HMRC investigations - not that this would matter if they did as all our bank statements have been kept for decades

There is no tax on gifts in the UK, so no need to declare anything to HMRC, if you receive a gift of any size from anybody.

The only issue is that if your Mother made a large gift to you ( more than £3K pa) and died within 7 years, that gift would be counted back in to her estate when the IHT calculation was done. So her estate can not incur more IHT by making large gifts, but if she dies within 7 years, you are kind of back to square one.
One caveat is that if the gift was very large and her estate was unable to pay any IHT due, they could come looking for the recipient of the gift to pay what was owing, but this is a rare situation.
Another issue is that if she needs care and asks the council to pay for it as she has given all her money away, they will take a dim view of that.

BR5500

Many thanks for confirming Albermarle, much appreciated.

Hopefully, my mother will live more than 7 years but purely for IHT purposes, I am assuming that she won't. It probably makes sense to take advantage of the annual £3k a year tax free gift which does not affect any future potential IHT.

As mentioned previously though, my parents' estate is worth substantially under the current £1m threshold (not significantly more than half of this amount) so unless the rules change in the new budget I currently have no concerns of being subject to any IHT. 

I know I shouldn't speculate, but if there were any massive changes to IHT that affected my case (unlikely I know), I guess then it would be a good idea to receive a substantial cash gift - that way, if mum lives another 7 years it would be IHT free and should she pass within 7 years, I would be no worse off. 

I can see how some people have a "head in the sand" policy towards this as it is not the most pleasant of subjects but since my father passed unexpectedly, this is a subject that keeps rearing its head.

The need and cost of potential care in future is indeed another potential thorny issue.