Confused about Inheritance Tax rules

Beeblebr0x

I'm married and I've left my half of our estate in my Will to our daughter. If I die first, I don't want my half passed to my wife in case she subsequently needs to go into a care home, where virtually all of her assets will be liable to pay for care. My wife's Will is worded the same.

Our house is worth 580k and our savings are 220k, so 800k in total.

I'd like to give our daughter 20k as a one-off as she needs it more than we do. According to a friend who's taken financial advice, I don't need to worry about the 7 year and the 3k annual gift rules as the value of my half of the estate won't be subject to IHT, so can I give away 20k now and not worry about dying in the next 7 years?

Is my friend correct?

Voyager2002

I think you should get your own professional advice.

Why do you believe that your daughter is exempt from IHT?

Beeblebr0x

Exempt insofar as my estate won't attract IHT

Keep_pedalling

Considering the size of your estate worrying about all the assets being used up by care costs is pointless as it is highly unlikely that more than 50% will be used up on care costs for a surviving spouse.

It might however be worth considering leaving half your home to your daughter with a life interest to the surviving spouse. The danger here is that the serving spouse may remarry and fail to make a new and a life interest trust would prevent this. This is also the most tax efficient way of doing it as it avoids a future CGT liability and, if your daughter is not already a home owner, avoids her loosing first time buyer status and having to pay an additional 5% SDLT when she does buy a home. This also provides better security for the surviving spouse as she is not venerable to your daughter running into financial difficulty, dying before her surviving partner or getting divorced.

You are correct that there would be no IHT to pay on the first death, but because your executors would need to claim your RNRB they would have to do a full IHT return on the first death. This would not be the case if your wills create a life interest via an immediate post death interest trust, as that is still covered by spousal exemption.

As for gifting to your daughter now, that is not a problem. Although there are no IHT implications in doing this, you should still keep records so that your executors are aware of any gifts which will still need to be declared. If neither of you made gifts last year the you can each use up the available annual exemptions from last year and this year giving a total exemption of £12k the remainder would be a pet so falls under the 7 year rule. If you gifted £14k now and £6k on the the 6th April you would only have a £2k PET and £18k exempt. Although your estate is under IHT teretory now it might not be in 7 years time so probably still worth doing it this way.

Albermarle

This would not be the case if your wills create a life interest via an immediate post death interest trust, as that is still covered by spousal exemption.

These types of trusts seem to be one of the few that make some sense, in certain situations anyway.
Once set up following the first death, is there any annual admin to deal with, like with some other trusts?

Beeblebr0x

Keep_pedalling said:

Considering the size of your estate worrying about all the assets being used up by care costs is pointless as it is highly unlikely that more than 50% will be used up on care costs for a surviving spouse.

It might however be worth considering leaving half your home to your daughter with a life interest to the surviving spouse. The danger here is that the serving spouse may remarry and fail to make a new and a life interest trust would prevent this. This is also the most tax efficient way of doing it as it avoids a future CGT liability and, if your daughter is not already a home owner, avoids her loosing first time buyer status and having to pay an additional 5% SDLT when she does buy a home. This also provides better security for the surviving spouse as she is not venerable to your daughter running into financial difficulty, dying before her surviving partner or getting divorced.

You are correct that there would be no IHT to pay on the first death, but because your executors would need to claim your RNRB they would have to do a full IHT return on the first death. This would not be the case if your wills create a life interest via an immediate post death interest trust, as that is still covered by spousal exemption.

As for gifting to your daughter now, that is not a problem. Although there are no IHT implications in doing this, you should still keep records so that your executors are aware of any gifts which will still need to be declared. If neither of you made gifts last year the you can each use up the available annual exemptions from last year and this year giving a total exemption of £12k the remainder would be a pet so falls under the 7 year rule. If you gifted £14k now and £6k on the the 6th April you would only have a £2k PET and £18k exempt. Although your estate is under IHT teretory now it might not be in 7 years time so probably still worth doing it this way.

Thank you very much for your reply. I'd have to double check but I believe there is a stipulation in the Will that my daughter cannot remove my wife from our home while she's still living there. Nothing has been set up by way of a Trust.

BTW, what is a RNRB?

Albermarle

BTW, what is a RNRB?

Residence nil rate band.

If you leave your home to your children, your get an extra £175K of nil rate band. If you are married this can be passed on unused so the 'second death estate' will have £350K RNRB, in addition to the standard NRB's