Putting a Property into a Trust when the Estate Value is Way Below IHT Threshold

BR5500

I'd imagine this isn't a great idea but I have been advised to put my mother's property (where I've lived for many years, and intend to stay there long-term) into a Trust, using a Section 102(B) gift.

The property is worth £400k and the total estate value is well below £600k so I cannot see the advantage of placing it in a Trust unless the IHT threshold is significantly lowered in the Budget. My parents' current RNRB is £1m, my late father's RNRB would have passed to my mother.

I've heard a few stories of Trusts being a nightmare to sort out after someone passes (not to mention costly to set-up and potentially run) so I cannot really see the advantage of putting the property into Trust when the estate is not subject to IHT. 

As far as I understand, Section 102(B) sub section (4) simply confirms that there is no Gift With Reservation of Benefit if the donor and donee live together. 

I am aiming to inherit my father's half share of the property by varying his will so that I will have the security of owning half the house now in case IHT rules are changed in the future. I understand that if my mother gifted the other half of the house to me now, the 7 year rule would apply.  I would imagine that becoming a joint tenant with my mother (due to varying my father's will to inherit his share of the property) is potentially my best option to obtain some form of security rather than getting involved with any Trust.

Greatly appreciate any feedback so I can most likely eliminate the Trust idea. 

Albermarle

I've heard a few stories of Trusts being a nightmare to sort out after someone passes (not to mention costly to set-up and potentially run) so I cannot really see the advantage of putting the property into Trust when the estate is not subject to IHT.

You heard correctly and they are to be avoided if possible. They tend to be more useful if you are VERY rich.

Also if either of your parents need care, the LA look very dimly on situations where assets have been given away.

In general you seem to be overthinking it and basing ideas on what may or may not be legislation in future.
Best just to keep things as simple as possible.

HappyHarry

Who has advised you to create this trust, and did you approach them or did they approach you?

p00hsticks

BR5500 said:

I am aiming to inherit my father's half share of the property by varying his will so that I will have the security of owning half the house now in case IHT rules are changed in the future. I understand that if my mother gifted the other half of the house to me now, the 7 year rule would apply

Was the house was left entirely to your mother ? If so it would be her, not you that would need to sign the deed of variation as she will be giving up part of her inheritance. 

I presume there is no possibility of your mother requiring state funded care in the futire ? If so, then she needs to consider deprivation of benefits befor giving away half the property. 

also bear in mind that - as I understand it - by varying your fathers will in your favour,  your mother would lose a good part of your fathers NRB. 

BR5500

p00hsticks said:

BR5500 said:

I am aiming to inherit my father's half share of the property by varying his will so that I will have the security of owning half the house now in case IHT rules are changed in the future. I understand that if my mother gifted the other half of the house to me now, the 7 year rule would apply

Was the house was left entirely to your mother ? If so it would be her, not you that would need to sign the deed of variation as she will be giving up part of her inheritance. 

I presume there is no possibility of your mother requiring state funded care in the futire ? If so, then she needs to consider deprivation of benefits befor giving away half the property. 

also bear in mind that - as I understand it - by varying your fathers will in your favour,  your mother would lose a good part of your fathers NRB. 

Yes, that's correct. All my dad's assets were left to my mother so the house was left entirely to my mother. My mother is in pretty good health currently with no need for care in the foreseeable future but I appreciate the concept of deprivation of assets.

As far as I am aware, the value of half the house (approx £200k) would come off the current £1m RNRB, so if I outlive my mother, the balance of the RNRB remaining would be approx £800k. I assume I'm correct in assuming that varying my father's will does not adversely effect the £1m RNRB in any other way, apart from naturally reducing the balance remaining?

As I 've lived with the parents for many years due to poor health, varying my father's will would just be a way of "locking-in" half of the house in my name and giving me some security should the RNRB be reduced in future Budgets. I'd imagine that the RNRB will remain frozen rather than reduced, but I'm very aware that should a drastic change be made to IHT thresholds, I could be liable to IHT.  

Naturally, if care is needed, I appreciate that the council would expect me to sell up unless I'm over 60, which I'm not.

Keep_pedalling

Who has advised her to do this? There are plenty of sharks out there charging fat fees to set up useless trusts that later down the line cause massive problems. She should not do this. 

Varying the will is also pointless, as it actually reduces her IHT exemptions because it removes a good chunk of the transferable NRB from your father’s estate. She could simply gift you his share and is it is a shared home it would fall out of her estate after 7 years. Gifting the other half would be foolish in the extreme as she loses her long term security and it would be a gift with reservation of benefit so not covered by the 7 years rule.

I would also caution her about giving any of it away unless there is no chance that you will ever move out.

BR5500

Keep_pedalling said:

Who has advised her to do this? There are plenty of sharks out there charging fat fees to set up useless trusts that later down the line cause massive problems. She should not do this. 

Varying the will is also pointless, as it actually reduces her IHT exemptions because it removes a good chunk of the transferable NRB from your father’s estate. She could simply gift you his share and is it is a shared home it would fall out of her estate after 7 years. Gifting the other half would be foolish in the extreme as she loses her long term security and it would be a gift with reservation of benefit so not covered by the 7 years rule.

I would also caution her about giving any of it away unless there is no chance that you will ever move out.

Definitely agree about not setting up a trust, it was a solicitor who specialises in trusts so is clearly more interested in earning fees than being of any help! 

I didn't realise that varying the will would have any negative impact on the transferable NRB from my father's estate - surely in this case, it would only remove £200k so the balance of the £1m married couple NRB remaining would still be £800k?

Or does varying the will mean that the £1m RNRB no longer applies? Our normal solicitor (not the trust advising one) said that varying the will won't effectively make any difference to the £1m RNRB in that if the will wasn't varied, I would later inherit a house worth £400k with £600k of the RNRB remaining (£1m minus £400k = £600k) whereas if the will is varied, I would later inherit half of the house worth £200k with £800k of the RNRB remaining (£800k remaining minus £200k half share of house = £600k) so, as far as I am aware, no material difference to the RNRB would be suffered by varying the will - unless I have missed something here? Does varying the will mean that the additional £175k per person is lost? I'd greatly appreciate clarification of the sums here regarding RNRBs on changing the will versus not changing it.

I thought the potential advantage of varying the will would be that should the IHT threshold be lowered in future, I would already have the security of half the house already inherited. Not very likely I know, but say that RNRBs are reduced to £100k in the future, I'd already have inherited half the house at the current rate of RNRB.

Our solicitor also mentioned that if I become a joint owner with my mother through changing the will, I would automatically inherit the house without having to go through probate but if I'm not sure this is correct? Unfortunately, I've experienced a lot of conflicting information from solicitors which has lead to delays in deciding what to do for the best. It's clearly not about IHT avoidance but just trying to give me some security as I intend on living in the house but naturally this won't be possible if IHT thresholds are drastically changed.

I think it would be best if the half share comes directly from my father as if my mother gifts me half the house, the 7 year rule applies and it's not that likely my mother will live another 7 years. Sadly, my father passed due to medical negligence, we fully expected him to live at least another 10 years. If we knew he would pass relatively young, we no doubt would have made arrangements earlier to compensate for the 7 year rule.

I totally agree re: my mother not gifting me the other half as then she would have to pay me rent. 

The issue of me moving out isn't a concern due to my health so that's one definite issue that won't occur. The only real issue is varying the will and finding that the RNRB of £1m is no longer valid but up until now, no solicitor has said this is an issue.

Many thanks for your help, much appreciated.

p00hsticks

BR5500 said:

Keep_pedalling said:

Who has advised her to do this? There are plenty of sharks out there charging fat fees to set up useless trusts that later down the line cause massive problems. She should not do this. 

Varying the will is also pointless, as it actually reduces her IHT exemptions because it removes a good chunk of the transferable NRB from your father’s estate. She could simply gift you his share and is it is a shared home it would fall out of her estate after 7 years. Gifting the other half would be foolish in the extreme as she loses her long term security and it would be a gift with reservation of benefit so not covered by the 7 years rule.

I would also caution her about giving any of it away unless there is no chance that you will ever move out.

I didn't realise that varying the will would have any negative impact on the transferable NRB from my father's estate - surely in this case, it would only remove £200k so the balance of the £1m married couple NRB remaining would still be £800k?

I'm not an expert, but I'm not sure if your mother could inherit your fathers RNRB if he's not actually leaving the property to her (which he wouldn't be if you varied the will in your favour). . By varying the will it's no longer an excepted estate.....

NorthYorkie

Your concern seems to be mainly about you being able to secure the property in which you live. If you are the only beneficiary under your mother's will and you have no other siblings who might challenge it, why are you concerned?

You ask " Does varying the will mean that the additional £175k per person is lost?" Varying your father's will in the way you  propose is foolish. At present your father's estate has no IHT liability because of the inter-spouse exemption, with is unlimited in scope . Although after the variation his estate will still not have an IHT liability, it will use up his £175,000 residential nil rate band and £25,000 of his 'normal' nil rate band, which cannot then be used against your mother's estate. There will only be £625,000 of 'normal' (£325,000 + £300,000 from father) and £175,000 of 'residential', making a total of £800,000 nil rate bands.  The £200,000 of your father's nil rate bands that you will have sacrificed by the variation, may well be needed in the future because you cannot know at this point what the value of the property will be when the time comes to calculate the IHT on your mother's estate.

I should add that I don't believe that the bands will be reduced. They will remain frozen and by such stealth the government will raise more tax as a result of inflation.

You also say "Our solicitor also mentioned that if I become a joint owner with my mother through changing the will, I would automatically inherit the house without having to go through probate" Yes if you and your mother were joint tenants as opposed to tenants in common, but what is the problem with getting probate? You will probably have to do that  anyway for the rest of her estate.

Finally, I detect that you do not have confidence in your solicitor. Maybe it's time for a change?

Keep_pedalling

Making a deed of variation makes sense where an inheritance comes from someone other than a spouse. So if for instance is someone inherits from a parent or unmarried partner and wants to pass that to their children then it reduces the risk of an IHT liability on the inheritance. Where the inheritance comes from a spouse then the combination of spousal exemption and transferable NRB cancels out any advantage of the DoV and where the inheritance exceeds 3325k will result in an immediate IHT liability.

One other point do you know if the property was owned as joint tenants or tenants on common? If the former your mother automatically became the sole owner by survivorship which would make a DoV impossible

Keep_pedalling

BR5500 said:

Keep_pedalling said:

Who has advised her to do this? There are plenty of sharks out there charging fat fees to set up useless trusts that later down the line cause massive problems. She should not do this. 

Varying the will is also pointless, as it actually reduces her IHT exemptions because it removes a good chunk of the transferable NRB from your father’s estate. She could simply gift you his share and is it is a shared home it would fall out of her estate after 7 years. Gifting the other half would be foolish in the extreme as she loses her long term security and it would be a gift with reservation of benefit so not covered by the 7 years rule.

I would also caution her about giving any of it away unless there is no chance that you will ever move out.

Definitely agree about not setting up a trust, it was a solicitor who specialises in trusts so is clearly more interested in earning fees than being of any help! 

I didn't realise that varying the will would have any negative impact on the transferable NRB from my father's estate - surely in this case, it would only remove £200k so the balance of the £1m married couple NRB remaining would still be £800k?

Or does varying the will mean that the £1m RNRB no longer applies? Our normal solicitor (not the trust advising one) said that varying the will won't effectively make any difference to the £1m RNRB in that if the will wasn't varied, I would later inherit a house worth £400k with £600k of the RNRB remaining (£1m minus £400k = £600k) whereas if the will is varied, I would later inherit half of the house worth £200k with £800k of the RNRB remaining (£800k remaining minus £200k half share of house = £600k) so, as far as I am aware, no material difference to the RNRB would be suffered by varying the will - unless I have missed something here? Does varying the will mean that the additional £175k per person is lost? I'd greatly appreciate clarification of the sums here regarding RNRBs on changing the will versus not changing it.

I thought the potential advantage of varying the will would be that should the IHT threshold be lowered in future, I would already have the security of half the house already inherited. Not very likely I know, but say that RNRBs are reduced to £100k in the future, I'd already have inherited half the house at the current rate of RNRB.

Our solicitor also mentioned that if I become a joint owner with my mother through changing the will, I would automatically inherit the house without having to go through probate but if I'm not sure this is correct? Unfortunately, I've experienced a lot of conflicting information from solicitors which has lead to delays in deciding what to do for the best. It's clearly not about IHT avoidance but just trying to give me some security as I intend on living in the house but naturally this won't be possible if IHT thresholds are drastically changed.

I think it would be best if the half share comes directly from my father as if my mother gifts me half the house, the 7 year rule applies and it's not that likely my mother will live another 7 years. Sadly, my father passed due to medical negligence, we fully expected him to live at least another 10 years. If we knew he would pass relatively young, we no doubt would have made arrangements earlier to compensate for the 7 year rule.

I totally agree re: my mother not gifting me the other half as then she would have to pay me rent. 

The issue of me moving out isn't a concern due to my health so that's one definite issue that won't occur. The only real issue is varying the will and finding that the RNRB of £1m is no longer valid but up until now, no solicitor has said this is an issue.

Many thanks for your help, much appreciated.

As the estate is well below IHT territory the 7 year rule so that is not worth worrying about. A DoV in this case is a pointless exercise it just complicates things. If your mother makes you a joint owner then yes probate will not be required when one of you dies. 

There is zero % chance that the IHT exemptions will be lowered to bring her estate into IHT territory, that would be political suicide.