Reducing IHT via rental property transfer

hjf12345

My 80 year-old mum owns a flat which she rents out for income. There is no mortgage and it’s worth about £400k.

She also has a mortgage-free residential home worth about £575k.

We’re wondering if there’s a way to put the rental property into some sort of trust in order to reduce IHT? 

She has five children and no spouse. 

If anyone can advise, I’d be grateful. Thanks 

Keep_pedalling

When you say no spouse, am I correct to assume she is not a widow? 

Trusts cannot magic away IHT. If she gives her rental property away to her children or puts it in trust then she will immediately have a capital gains tax liability. If she still needs the income from the rental property then this would be classed as a gift with reservation of benefit so the 7 year rule no longer applies so the rental property would never fall out of her estate. 

Albermarle

Trusts can be complicated and expensive to run. Plus HMRC are not stupid, so there are rules in place about tax being paid.
The best way to avoid IHT, is to give assets away to friends and relatives and hope you live another 7 years, or to just give money to charity, either when alive or in your will. 

Jeremy535897

Keep_pedalling said:

When you say no spouse, am I correct to assume she is not a widow? 

Trusts cannot magic away IHT. If she gives her rental property away to her children or puts it in trust then she will immediately have a capital gains tax liability. If she still needs the income from the rental property then this would be classed as a gift with reservation of benefit so the 7 year rule no longer applies so the rental property would never fall out of her estate. 

Actually you can hold over the capital gain on a property given to most types of lifetime trust, which means the trust will acquire mother's base cost, so the CGT free uplift on death is lost. There are potential downsides if the property becomes the main residence of a beneficiary. There would be some inheritance tax on the gift though, and if she dies within seven years, it's still in her estate. She would have to permanently exclude herself from any benefit from the trust.

poseidon1

Jeremy535897 said:

Keep_pedalling said:

When you say no spouse, am I correct to assume she is not a widow? 

Trusts cannot magic away IHT. If she gives her rental property away to her children or puts it in trust then she will immediately have a capital gains tax liability. If she still needs the income from the rental property then this would be classed as a gift with reservation of benefit so the 7 year rule no longer applies so the rental property would never fall out of her estate. 

Actually you can hold over the capital gain on a property given to most types of lifetime trust, which means the trust will acquire mother's base cost, so the CGT free uplift on death is lost. There are potential downsides if the property becomes the main residence of a beneficiary. There would be some inheritance tax on the gift though, and if she dies within seven years, it's still in her estate. She would have to permanently exclude herself from any benefit from the trust.

Concur 100% with Jeremy535897's summary.

It is doable without triggering  an immediate cgt liabilty, but on  the value quoted going in there is a 20% IHT entry charge on the £75k exceeding the NRB. 

If mum  survives the 7 years, the trust itself will have a recurring 10 year anniversary IHT liability at 6% of the value exceeding the trust's NRB at the time. 

As for income tax, if a discretionary trust format is used rents are taxable at 45% annually.

As for future repairs and maintenance, unless a good proportion of future rents ( net of tax ) is held back in the trust, where will the trustees find capital for capital spends on the property?

As indicated, it's doable but tax and practical  trust admin and accounting issues renders this an unattractive option.

NorthYorkie

What other assets does she have besides the two properties?
Also can you respond to the question whether she is a widow? 

hjf12345

Sorry for the delayed reply and thanks for your thoughtful responses. 

My mum was widowed in 1990 and never re-married. 

Aside the two properties, she has about £30-50k in cash savings accounts. And that’s it (except for inexpensive car, furniture etc).

hjf12345

Thanks again to those who replied to my original post. 

A new question: 

If my mum was to sell the rental property now, gift the money (approx £400k) equally to her five children, with each child then gifting her back a few hundred pounds a month for her to live on, what would be the tax implications if:

a) she lives for at least 7 more years after the original sale/gifting to her children
b) dies within that 7 years

She has a residential home worth £575k, is a widow and has approx £40k in other investments. 

Thanks 

poseidon1

hjf12345 said:

Thanks again to those who replied to my original post. 

A new question: 

If my mum was to sell the rental property now, gift the money (approx £400k) equally to her five children, with each child then gifting her back a few hundred pounds a month for her to live on, what would be the tax implications if:

a) she lives for at least 7 more years after the original sale/gifting to her children
b) dies within that 7 years

She has a residential home worth £575k, is a widow and has approx £40k in other investments. 

Thanks 

You indicate she was widowed in 1990.

On the assumption your father ( ?) left his entire estate to her at that time she would have £1 million in various nil rate bands available  to her estate on death ( ie 2 x £325k and 2 x £175k). 

Therefore on her current assets of around £ 1.015 million there is a mere £6,000 IHT exposure.

As for your mother selling the property at £400k , surely she  would face a CGT liabilty thereon, possibly exceeding her current £6k IHT exposure.

Add in the fact that if she holds the rental property until death, all her past capital gains are automatically erased, I question the wisdom or necessity for your complicated proposal, which could go wrong in many different ways.

In summary on your mother' s current IHT exposure, unless the family considers an IHT bill of £6k completely objectionable I see no need for any precipitous action.

Your mother merely needs a will in place that reflects her wishes, and perhaps a Lasting Power of Attorney as a precautionary measure in case she is unable to handle her own affairs in future.