Inheritance tax help

Apeandguy

Hi all.  Any help would be appreciated.  My parents house is worth approx 600k + some minor savings.   We obviously want to avoid paying as much inheritance tax as possible (legally).  I have 2 sons,   what is the best thing/s to consider pls??  Gifting or sign house over to me/my son's etc??   Pls help 

Thanks

Keep_pedalling

Your parents have £1M of exemptions between them so there will be no IHT to pay, so no need to do anything. Even if they were in IHT territory signing over the house would be nuts, not only would they lose their long term security, it would also be classed as a gift with reservation of benefit so would still form part of their estate if they survived 7 years.

Each of them have a nil rate band (NRB) of £325k and a residential NRB of £175k and both of those can be transferred to the surviving spouse on the first death hence £1M in total.

swingaloo

You don't have an inheritance till your parents pass away. Anything could happen between now and then, savings and house may be eaten into. 

Apeandguy

Keep_pedalling said:

Your parents have £1M of exemptions between them so there will be no IHT to pay, so no need to do anything. Even if they were in IHT territory signing over the house would be nuts, not only would they lose their long term security, it would also be classed as a gift with reservation of benefit so would still form part of their estate if they survived 7 years.

Each of them have a nil rate band (NRB) of £325k and a residential NRB of £175k and both of those can be transferred to the surviving spouse on the first death hence £1M in total.

Thank you.   My parents are worried that if anything did happen the house would pass to me but I'd have to pay a lot of iht?    So hence they were looking to give me some money or sign the house over to avoid as much as possible.   This will put their minds at ease, so thank you.   I do realise that they obviously may need it for future security/health care too 👍

VyEu

Are your parents married? The above comments assume they do, and that upon the death of the first they leave everything to the surviving spouse. Only then so you benefit from the 1m coming down to you (provided you are the only child).

If they sign over the house to you now but continue to live in it (not paying market rate rent) then it's classed as a gift with reservation of benefit and therefore treated as part of their estate on death. If they are giving it to you to avoid care home fees, the local authority may view the transfer as deliberate deprivation of assets.

If they give you cash outright and they survive 7 years, then no IHT to pay. If they die within the 7 years, taper relief applies depending on how many years it has been since they gifted it to you.

Another solution would be for them to sell, downsize, use some of the proceeds for their own house and give you the rest. Smaller house, likely a smaller estate on death so more likely to fall under the threshold. You would then also be able to take th cash as an outright gift (subject to 7 year rule above).

Another suggestion is they move out of the house, transfer it to you and they rent/buy somewhere else entirely. As above, house would fall under the 7 year gift rule and the other house (if not renting) falls part of their estate.

Once a gift is made however it no take backs 

Apeandguy

VyEu said:

Are your parents married? The above comments assume they do, and that upon the death of the first they leave everything to the surviving spouse. Only then so you benefit from the 1m coming down to you (provided you are the only child).

If they sign over the house to you now but continue to live in it (not paying market rate rent) then it's classed as a gift with reservation of benefit and therefore treated as part of their estate on death. If they are giving it to you to avoid care home fees, the local authority may view the transfer as deliberate deprivation of assets.

If they give you cash outright and they survive 7 years, then no IHT to pay. If they die within the 7 years, taper relief applies depending on how many years it has been since they gifted it to you.

Another solution would be for them to sell, downsize, use some of the proceeds for their own house and give you the rest. Smaller house, likely a smaller estate on death so more likely to fall under the threshold. You would then also be able to take th cash as an outright gift (subject to 7 year rule above).

Another suggestion is they move out of the house, transfer it to you and they rent/buy somewhere else entirely. As above, house would fall under the 7 year gift rule and the other house (if not renting) falls part of their estate.

Once a gift is made however it no take backs 

Yes they are married and I'm an only child.   So if they just continue as they are, the estate falls to the surviving parent and then as per the will passes to myself (with a 1 million pound iht limit??).    Then I can do what I wish with the house etc??  So probs best they stay in the house and use it if needed for care etc..   

GrumpyDil

Yes, doing anything else is completely bonkers and likely to cause more issues anyway. Bear in mind if the house was transferred to you and you don't live there you'll be liable to Capital Gains Tax.

Apeandguy

GrumpyDil said:

Yes, doing anything else is completely bonkers and likely to cause more issues anyway. Bear in mind if the house was transferred to you and you don't live there you'll be liable to Capital Gains Tax.

So I'm best to just leave as is and get the house etc.. when the worst happens 😭

VyEu

Apeandguy said:

VyEu said:

Are your parents married? The above comments assume they do, and that upon the death of the first they leave everything to the surviving spouse. Only then so you benefit from the 1m coming down to you (provided you are the only child).

If they sign over the house to you now but continue to live in it (not paying market rate rent) then it's classed as a gift with reservation of benefit and therefore treated as part of their estate on death. If they are giving it to you to avoid care home fees, the local authority may view the transfer as deliberate deprivation of assets.

If they give you cash outright and they survive 7 years, then no IHT to pay. If they die within the 7 years, taper relief applies depending on how many years it has been since they gifted it to you.

Another solution would be for them to sell, downsize, use some of the proceeds for their own house and give you the rest. Smaller house, likely a smaller estate on death so more likely to fall under the threshold. You would then also be able to take th cash as an outright gift (subject to 7 year rule above).

Another suggestion is they move out of the house, transfer it to you and they rent/buy somewhere else entirely. As above, house would fall under the 7 year gift rule and the other house (if not renting) falls part of their estate.

Once a gift is made however it no take backs 

Yes they are married and I'm an only child.   So if they just continue as they are, the estate falls to the surviving parent and then as per the will passes to myself (with a 1 million pound iht limit??).    Then I can do what I wish with the house etc??  So probs best they stay in the house and use it if needed for care etc..   

Sort of.

Is the house in joint names as a joint tenancy (not tenants in common). If yes, then then house will automatically pass to the other on the first ones death (and benefits from spousal exemption of no IHT). This happens regardless of what is said in a Will, or even if there isn't one. There is no IHT to pay for the surviving spouse.

If the house is held as tenants in common, the house does not automatically pass to the survivor. The deceased half share falls under the Will or the rules of intestacy (if no will). If there's a Will, estate is divided in accordance with the Will and any gifts to people other than the spouse may start to attract IHT, even if only the nil rate (see below).

If no Will (seems there is a Will but I'm unsure if they both do) then the spouse takes the first £322k of the estate.  This is the 'spousal legacy'. The remainder is split between you and the surviving spouse. If you receive anything (like with gifts to non spouse made under a Will), the first 325k of the nil rate band applies to what goes to you. So say for example you receive 100k, then this reduces the nil rate band to 225k and then this is passed to spouse. You do not pay tax on the 100k.
The effect is that on the second ones death, you have £900k IHT 'free' (£225k plus £325k plus £175k plus £175k).

In short, to get the full 1m band the parents need to leave their estate to the other via Will, and then on the death of the second, it passes to you and you pay IHT over the threshold. That being said, there's nothing stopping the survivor changing their Will to prevent you from inheriting or giving it all to charity etc. and you quite rightly mention spending it on care home fees. 

Keep_pedalling

A couple of things your parents should do, if they have not already done so, is make wills and put lasting powers of attorney in place. 

Loosing mental capacity can cause your loved ones a lot of grief and financial difficulty you don’t have LPAs in place.

RAS

Absolutely, LPAs can be done on line for a small fee. 

Regarding wills, one other option is to "sever the tenancy" and for each parent to leave the survivor a life interest (an Immediate Post Death Interest trust allowing them can live there until they die) but make yourself the inheritor. That means that half the value of the house could be protected from care home fees, whilst avoiding CGT. 

You can't visit the solicitor with your parents but try and explain that any other sort of trust is likely to be a complete nightmare and to involve lots of costs and taxes. Read some of the other threads on this forum about trusts, including those where couples have made the will writers trustees and lost control of their assets.

Your parents need to use a STEP registered solicitor.