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

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. 

Many thanks for your reply. Yes, the house was left entirely to my mother. My mother is currently in pretty good health and there is no likelihood of state funded care in the foreseeable future but I understand the concept of deprivation of assets.

The main reason my solicitor suggested carrying out a deed of variation so I inherit my father's half now was that should my mother need care in the future, my solicitor claimed that it would be less likely the authorities would come after the house if I was a joint owner and that this would give more security regarding care home fees. Of course, I'm not sure if this is true? If looked into from a deprivation of assets point of view, they would see that the will was changed so as usual, I'm not sure if the solicitor's advice re: care fees was correct?

I really appreciate the point about losing a good part of my father's NRB as I was told that varying the will would not make any material difference apart from losing the NRB value of my father's half share of the house. It now transpires as though varying the will could ruin the chance of a £1m RNRB as instead of my father leaving everything to my mother and then my mother leaving everything to me, varying the will means that my father did not leave everything to my mother so this could ruin the £1m RNRB - this is a very important point in deciding whether to vary the will as naturally making the RNRB smaller is the last thing I want to do!

The only point I have considered related to losing a good part of my father's NRB is that by varying the will, I would effectively own half the house at today's prices - so if for example, my mother was to live another 10 years, the house price could double or more in that time. It could even exceed the IHT threshold by then as I can imagine that IHT thresholds could be frozen for many years beyond the current 2030, given the current agenda. So if I'd already "locked-in" half of the value of the house at today's price, I would be protected from future house values rising against frozen IHT thresholds. But in saying that, I appreciate that losing a chunk of my fathers NRB would negate this so it's arguably swings and roundabouts. 

The only other point I've considered is that if I should outlive my mother, it is possible that I may renovate the house and sell it. If I did this after inheriting the house from my mother and going through probate, would I need to pay CGT on the sale price versus the lower, renovated probate value or would I be exempt from any CGT as it is my sole residence? I understand if I had my own place and renovated a house I inherited, I'd be subject to CGT on the sale price versus the probate value whereas I'm assuming that given I've lived with the parents for many years and it is my main and only residence, I'd be exempt from CGT? (I'm aware Labour are considering removing the CGT exempt for own residences above £500k but I very much doubt they'll get away with this).

One other potential advantage of varying the will and becoming a joint owner with my mother would be avoiding CGT on renovating the house but as I say above, CGT may not be applicable even if I inherit the property from my mother and renovate it due to the main residence exemption.

BR5500

NorthYorkie said:

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?

Many thanks for your reply. My only concern re: securing the property in which I live is the fear of potential changes to IHT. I'm very aware that should IHT thresholds change drastically in the future, I would be homeless as naturally I have no claim to the house, I have lived in the house for many years but have no legal title to it other than my parent's will. I have no other concerns relating to securing the property apart from this.

Am I correct in assuming that varying the will would not ruin the potential £1m NRB? As far as I understand it, to qualify for the full £1m, my father would have to leave everything to my mother and then my mother would have to leave everything to me - so if the will was varied, my father would not actually being leaving everything to my mother. In this case, could it damage the ability to qualify for the full £1m?

The only point I have considered related to losing a good part of my father's NRB (£200k) is that by varying the will, I would effectively own half the house at today's prices - so if for example, my mother was to live another 10 years, the house price could double or more in that time. It could even exceed the IHT threshold by then as I can imagine that IHT thresholds could be frozen for many years beyond the current 2030, given the current agenda. So if I'd already "locked-in" half of the value of the house at today's price, I would be protected from future house values rising against frozen IHT thresholds. But in saying that, I appreciate that losing a chunk of my fathers NRB would negate this so it's arguably swings and roundabouts. 

My mother has also considered varying my father's will so that I inherit my father's savings but this was a relatively small amount as most of my parents' savings were in my mother's and joint names, I'm assuming any joint accounts would have been automatically inherited by mother so these could not be changed so that I inherit them from my father. And again, I don't think it's wise to potentially complicate the concept of my father leaving everything to my mother and my mother everything to me re: the £1m NRB.

It's good to hear you don't believe that the bands will be reduced. As long as they remain at £1m, it is highly unlikely that the total estate would exceed £1m, even in 10 years time unless house prices more than double. It is likely that my mother will use most of the her savings to live to supplement her modest pension, so I'm hoping that that savings won't be an issue re: IHT.

Our solicitor made a big deal of me not needing to go through probate but this should not be any problem. Naturally, it would be good to make things as simple as possible should I outlive my mother so not having to go through probate would be a bonus but I have heard that even if I am a joint owner with my mother and the house is below the IHT threshold, it would still need to valued for IHT purposes anyway. For example, as far as I'm aware, if a child was a joint owner of a property whose value exceeded £1m, the child would still be liable for IHT, regardless of being a joint owner or not.

The other complication re: me becoming a joint owner with my mother is that some say we'd need to share bills 50/50 and declare the will change to HMRC whereas others (including our solicitor) have said that who pays the bills is of no interest to HMRC when joint owners and that no declaration would need to be made to HMRC as varying my father's will has no IHT liability. Of course, it would not be a problem sharing bills as naturally I've contributed to bills and the upkeep of the house over the years (I only keep my bank statements for 7 years though so a lot of my earlier contributions I've made, I'd be unable to officially prove) but I would be interested to know if we would officially have to pay exactly 50/50 in household bills if joint owners. Even if my mother paid all my bills though, the cost of effectively gifting this amount would not push the estate value over £1m, including the gift of paying my share of the bills.

BR5500

Keep_pedalling said:

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

That's a very important point you make re: my parents owning the property as joint tenants! I have literally endured months of headaches over this as some solicitors adamantly insist that the joint tenancy can be easily severed for IHT and CGT purposes by using the IHTA 1984 S142 clause which would enable me to inherit the property directly from my father, in the same way as if he had severed the joint tenancy before his passing. They've claimed to have carried this out many times before and that HMRC were fine with this arrangement.

However, other solicitors are equally adamant that it is 100% impossible, with no exceptions, to severe a joint tenancy after someone has passed! They say that my mother could gift half of the house to me, from her, and this is the best that could be done. This seems fairly pointless to me, as if my mother does not live for another 7 years it would make this option totally pointless. While I hope my mother lives much longer than 7 years, frankly if we planned to do this, we would have done it about 10 years ago. As I've mentioned before, I expected my father to live at least another 10 years so this has turned my thoughts to doing everything I can to secure the house, naturally my mother is equally concerned about my future security.

I've also heard that if my mother gifts me half the house, we would officially have to pay all the bills and household upkeep costs 50/50 but I'm not sure that this correct? I've even heard (I'm sure incorrectly) that if my mother gifts me half the house she would have to pay me rent to live there but I'm sure this is incorrect as Section 102(B) sub section (4) ensures that there is no Gift with Reservation of Benefit if the donor and donee live together. 

In a nutshell though, it certainly seems as though varying the will has many potential complications (especially the concept of whether it can be varied at all re: severing the parents' joint tenancy) and of course, at current levels, the estate is way below the £1m threshold anyway! So I can totally understand how I must sound to be massively overthinking this but I just thought it was worth exploring the options of varying the will to potentially give me some extra security while there's still time do to it.

BR5500

Keep_pedalling said:

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. 

Yes, exactly the estate is well below the IHT territory and is likely to remain so for many years to come, unless the thresholds are drastically lowered. I'm just very concerned about IHT as it certainly appears as though assets are being heavily targeted for IHT at unprecedented levels, e.g. the loss of agricultural IHT relief and bringing private sector pensions into IHT does make me wonder if IHT will be increased for everyone in the coming years so initially, I thought that if there is a way to inherit half the property from my father at current IHT rates it could be worth pursuing to "lock-in" half the house now but it definitely seems as though it could cause more complications than its worth.

I greatly appreciate the advice on here because I'm tending to find that solicitors are all for varying the will as it gives them more work! That might sound a little cynical but it's hard to find impartial advice from solicitors that says it's not worth doing as they naturally benefit in fees from carrying out the variation in the will!

NorthYorkie

The main problem with trying to forecast Inheritance Tax liabilities is that we do not know when the person concerned is going to die. Consequently, we have no idea what the value of their estate will be at that time (or, indeed, what the tax rules may be then - the best we can do is to assume that the current rules, and any known changes, will still apply). So I think you are trying to overthink the issues in worrying about future changes.

Let's concentrate on the proposed Deed of Variation. Your parents held the house as joint tenants which means that your mother automatically inherited your father's share and became the sole beneficial owner. The question then arises, 'can the Deed be effective in transferring that inherited interest to yourself?' Normally a joint tenancy can be 'severed' by one of the joint tenants giving notice to the other. Whilst there seems to be some debate whether it is actually possible to sever a joint tenancy after the death of one of the tenants, the Land Registry seems quite clear;

 "Various tax statutes permit the ‘post-death severance’ of a beneficial joint tenancy. However, whatever the tax legislation provides, there is no alteration to the fundamental principles of real property law. So that:

"where A and B were jointly wholly entitled to the beneficial interests and were, immediately before the death of A, holding as beneficial joint tenants, immediately on the death of A, B becomes the sole legal owner." and 
"If B wishes to ‘sever’, B cannot do so. There is nothing to sever."

Assuming it is less than 2 years since your father died and a Deed is entered into, as proposed, and accepted by HMRC, your mother would have to be a party to that Deed. So, despite the fact that the Inheritance Tax Act regarding the transfer of the interest in the house as having been made by your father, this does not, in my view, apply for the purposes of the 'depravation of assets' rules. This is not an area in which I have any experience but I cannot imagine this kind of situation has been overlooked by the legislation. However, you have already stated that you don't see the need for funded care in the near future.

Finally, as has already been explained the Deed will have reduced the total nil rate bands available on your mother's estate down to £800,000, thus if at that point, her estate exceeds that figure then, subject to the amount of that excess, additional tax of £80,000 could arise as a result of the Deed.

I think that by now you have all the factors you need to make a decision.