Elderly widowed mother and IHT planning strategies?

lohr500

Hello all.

I posted several questions over the past couple of months relating to IHT & Probate following my father's death in November. And I am extremely grateful for all the replies received by Forumites. These helped me to navigate my way through the IHT and Probate process without having to involve solicitors or incurring other professional fees.

Whilst wishing dearly that my mother will enjoy many more years of life, I and the rest of the family have to recognise that at 90 years old, she is not immortal. So our thoughts now turn to how best to manage her estate from an IHT planning perspective.

We are happy to pay for specialist advice if needed, but I don't think her estate is particularly complicated and my gut feel is that we can probably put a plan together without paying for advice.

Basic numbers : 

The house is valued at £585,000. The house is fully paid for with no outstanding mortgage.
She has savings of £380,000. All the savings are in cash ISA's & Premium Bonds.
Her current account holds +/- £3000.
Other assets including her car, house contents, etc are circa £40,000
She has no debts, other than the ongoing utility bills which are all paid monthly in arrears.

Her pension is made up of her own state pension, the state pension she has inherited from my father, two annuities inherited from my father and her council pension from her working days. Ss far as I have been able to establish, none of these will have any residual value on her death.


All the tax free interest from the Cash ISAs & PB winnings are paid into a seperate holding account along with any "Surplus income" from her current account. The plan is to use these funds to make regular "gifts from surplus income" to the grandchildren. Something that both my mother and father were doing anyway prior to his death.

She will also use the £3000 gifting allowance each year.


Based on the numbers above and factoring in that the house is likely to increase in value, year on year, I am sure the estate will be subject to IHT, but not by a massive value. 


in this scenario, what are the likely recommendations that we might get from expensive paid advice??!!!

I'm wondering if the simplest approach would be for her to gift say £200k from her capital reserves as soon as possible under the 7 year IHT taper rules which would bring the estate value back into Excepted category. The gifts would really help the grandchildren at this point in their lives.
If she did pass away within the 7 year window, then IHT would be payable on the gifts, but IHT would be payable anyway on anything over the Excepted value when she does pass. 
Is this a stupid idea?

Should we be considering more complex planning such as trusts?

Any thoughts/input would be greatly appreciated.

silvercar

The first thing is to make sure she has sufficient funds for decent life and care for the remainder of her time. 

Over and above that, making any large sum gift now has the potential to be outside of her estate, or at least the tax would be tapered down.

Not a lot else you can do, other than the gifts out of surplus income.

The costs of setting up a trust would probably not be justified.

lohr500

bobster2 said:

lohr500 said:

Based on the numbers above and factoring in that the house is likely to increase in value, year on year, I am sure the estate will be subject to IHT, but not by a massive value. 

Are you sure? I'm assuming they were married and in a previous thread you indicated that your father left everything to your mother. So with his transferable nil rate band and residence nil rate band there may be no IHT due on your mother's estate.

With transferable allowances - her estate could be worth £1 million before any IHT is due.

Hi @bobster2 Thanks for the reply.

Yes, they were married and he did leave everything to her.

He did gift £79k from surplus income which was a discussion in another thread. (The HMRC IHT calculator showed the estate to be Excepted when I added this £79k as gifts during the IHT/Probate calculation on his passing).But after discussing this with the HMRC IHT team, it seems as though this can be excluded from his NRB/RNRB transferable allowance.

So yes, at today's house valuation, the estate could just scrape above the £1M and IHT would be minimal.  
My only concern though is that the house value will increase over time and I can't see the Govt. increasing the IHT threshold value any time soon.

The two big unknowns are how long my mother will live and if she will need expensive care home costs in the future. Any care home costs would erode her capital, but in a care home scenario her house would be sold anyway.

I guess given the marginal IHT liability as things stand today, there is a strong case for doing nothing. 
But gifting £50k each to her four grandchildren would be a big help for them as they make their first steps up the housing ladder.

If she gifted £200k now and sadly passed away tomorrow, does that £200k get factored into the overall IHT calculation, or is it immediately subject to 40% IHT regardless, even though the estate would then be circa £200k BELOW the estate IHT threshold value? 

lohr500

silvercar said:

The first thing is to make sure she has sufficient funds for decent life and care for the remainder of her time. 

Over and above that, making any large sum gift now has the potential to be outside of her estate, or at least the tax would be tapered down.

Not a lot else you can do, other than the gifts out of surplus income.

The costs of setting up a trust would probably not be justified.

100% agree. Priority no 1 is to make sure she can enjoy the rest of her life and not have to worry about her spending. Fortunately her monthly pension income is way in excess of her needs and the value of her assets/savings should cover a reasonable period of specialist care if/when needed.

Sea_Shell

Does she still make all the decisions herself about her finances, or do you have (and are using) a Power of Attorney.

AIUI, once (if) she loses capacity to CHOOSE to gift, then her attorney cannot gift unless it was specified on the documents, and even then it might be a grey area. 

Mitigating IHT isn't in the best interests of Mum, but of her beneficiaries.


p.s. - Still driving at 90?   Do you need to have "the conversation" about that?   

Keep_pedalling

Any non exempt gifts she makes would still be form part of her estate for IHT purposes if she died within 7 years of making the gifts. Considering that any IHT her estate might have to pay is going to be minimal I would not touch trusts with a long bargepole (just search this forum to see the number of threads that are concerned with the negative consequences that trusts can create for those administering estates).

If your mother lives well into her 90s then her expenditure is likely to increase over the years for things like home help and possible care needs so she really should not deplete her liquid assets too much. Our estates are currently well Into IHT territory but we want to avoid ending up in a care home if at all possible so have maintained a level of savings that would enable us to fund, if the worse should happen, live in carers or if that is not possible the best residential care available locally so we maintain enough liquid assets for both of us to self fund any care requirements for at least 3 years.

IHT planning really should not be left to your 80s or 90s and beyond what she is doing now I see no merit in taking any other action to reduce a potential small IHT liability. This does not mean she should not make gifts to help with things like house deposits for GC but the main purpose of any gift is to help financially rather than IHT planning.

bobster2

Keep_pedalling said:

If your mother lives well into her 90s then her expenditure is likely to increase over the years for things like home help and possible care needs so she really should not deplete her liquid assets too much.

Important to bear in mind - as her care and living costs increase, and she starts to need to use capital to pay for these costs - then obviously she cannot make gifts from surplus income.

Keep_pedalling said:

I see no merit in taking any other action to reduce a potential small IHT liability. This does not mean she should not make gifts to help with things like house deposits for GC but the main purpose of any gift is to help financially rather than IHT planning.

Agree with this 100%.

Grumpy_chap

lohr500 said:

Basic numbers : 

The house is valued at £585,000. The house is fully paid for with no outstanding mortgage.
She has savings of £380,000. All the savings are in cash ISA's & Premium Bonds.
Her current account holds +/- £3000.
Other assets including her car, house contents, etc are circa £40,000
She has no debts, other than the ongoing utility bills which are all paid monthly in arrears.

With those figures and the transferred IHT allowance form your father, the Estate is unlikely to reach the threshold that IHT will be incurred.  Assuming that the house will be left to her children.

Her (and your) priority should be to ensure that she has the best possible quality of life and that might mean ability to fund suitable care at some point.  It may mean that expenditure increases significantly from current profile.

Gifts, assuming she survives a further 7 years may well avoid IHT (which might be nil in any case) but will quite possibly still be considered as assets should the conversation around care fees arise.

lohr500

Thanks again everyone.

Just so I am clear @Keep_pedalling are we saying that if she did gift £200k now (outside of any gifting from surplus income) then that £200k forms part of the IHT calculation if she passes within the 7 year rule? So the GC would not have any iht liability if the total asset value was less than £1M including the £200k gifts.

She wants to help the GC with house deposits.

After the £200k gifts, she would still have £585k in the house and £180k of accessible savings, plus any ongoing surplus income she chose to keep. Rightly or wrongly, I'm thinking that value, along with her +/- £3k per month pension income should be adequate to cover any longer term care costs. 

Keep_pedalling

lohr500 said:

Thanks again everyone.

Just so I am clear @Keep_pedalling are we saying that if she did gift £200k now (outside of any gifting from surplus income) then that £200k forms part of the IHT calculation if she passes within the 7 year rule? So the GC would not have any iht liability if the total asset value was less than £1M including the £200k gifts.

That is correct

She wants to help the GC with house deposits.

After the £200k gifts, she would still have £585k in the house and £180k of accessible savings, plus any ongoing surplus income she chose to keep. Rightly or wrongly, I'm thinking that value, along with her +/- £3k per month pension income should be adequate to cover any longer term care costs. 

Yes, that would be more than adequate to fund any likely care costs. The only restriction would be if she wanted a long term (over 3years) live in carer which would need to all come out of liquid assets. 

Having gifted significant amounts to our children over the years, the main benefit is not IHT reduction but the chance to see your money put to good use in your lifetime, once you are dead you no longer get that joy.

Cubicsrube

lohr500 said:

 So the GC would not have any iht liability if the total asset value was less than £1M including the £200k gifts.

Others will correct me if I'm wrong, but even if there was IHT to pay, the grandchildren wouldn't be liable -- the estate would. (Though as KP and others have said it looks unlikely given the numbers). HMRC only go after the recipients of gifts if there is an inheritance tax to pay and not enough of the estate left to pay it because all the assets were given away.

One other thing to be aware of - again based on counsel I've received - is that the local authority also have a look-back period for recouping care home fees from people who gave away assets then ran out of money. And their investigations are a lot more frequent and thorough. Doesn't sound like that's an issue for you but something to be aware of - there's a lot of shady IHT-avoidance advice out there.