Inheriting property, reducing IHT and managing a trust! Help!

ben.bayliss

Hi everyone,

First of all, I will start by saying that I realise the specifics of this case will require a conversation with a solicitor and a Financial Advisor as they're fairly involved. What I'm really looking for here is a few pointers to get me going in the right direction. I'm sure the actual answer is actually quite straightforward, but the complexity will lie in the actual implementation!

When my gran died in November 06, she left her flat to my dad in her will. The probate has not yet been done yet due to my dad (also the executor) being partly very busy, partly lazy and partly avoiding the emotion that dealing with it obviously comes with it. However we're starting to nag him a bit more, and hopefully in the next couple of months it'll all get settled.

We are keen to keep the flat in the family and rent it out to benefit from a regular extra income, rather than a single lump sum by selling it. However we're also concious that if my dad takes on the property, then gifts it away to a trust fund, there would be a 7 year window of risk in case he died.

My dad is a higher-rate tax payer, and is aware that his estate when he dies will already be over the inheritance tax threshold due to the value of the family home. By inheriting the flat, he will be adding yet more 'value' to his estate, increasing the potential bill further down the line. Also, as a higher-rate tax payer, any income received by renting the place out will be taxed at 40% - add that to the ~10% agent fees for managing the property and that's half the rental income disappeared!

So - on to the questions! They concentrate on finding the most tax efficient and future-proof method of managing the flat:

- Even though the will specifically names my dad, can he infact divert the ownership elsewhere (eg. to a trust) to avoid ever actually 'owning' the property to avoid the tax on gifts? Would a 'deed of variation' be something that could achieve this as from my brief research it appears that this is a method by which a will can be altered with the agreement of all concerned?

- Can the solution be as simple as setting up a trust fund (however that is done!), with all the family named as beneficiaries to spread the tax burden?

- If a trust can be set up, can he retain administrative control be able to use rental proceeds to pay for occasional appliances / repairs etc..? Also a concern would be to be able to prevent the forced sale of the property by one beneficiary demanding to cash out their portion of the trust?

- How does a trust work from a tax perspective? Presumably at some point (since the trust will be generating rental income) there will be an income tax liability (and if so, at what level/rate), or is this only the case for proceeds taken from the fund to a beneficiary which is then taxed on an individual basis according to their personal circumstances via annual tax returns etc..?

...and more questions to follow, I'm sure!


Hopefully someone out there will be able to point us in the right direction, and answer some of these questions. I have tried googling around, but unfortunatley this sort of thing doesn't seem to be well documented.

Many thanks in advance for any suggestions / comments,

Ben.

(Note to mods: If this could be better placed in another sub-form, please feel free to move it!)

CLAPTON

If your father is willing to give it to his children now, he can do a deed of variation in their favour within 2 years of the his mother's death.
It is then outside his estate and so it doesn't matter when he dies (for IHT purposes).
The house will be his children's of course and they can collectively do whatever they like with it and any taxation issues are theirs to pay.

I see no benefit in setting up a trust.

ben.bayliss

CLAPTON wrote: »

If your father is willing to give it to his children now, he can do a deed of variation in their favour within 2 years of the his mother's death.
It is then outside his estate and so it doesn't matter when he dies (for IHT purposes).
The house will be his children's of course and they can collectively do whatever they like with it and any taxation issues are theirs to pay.

I see no benefit in setting up a trust.

Thanks for kicking the ball off!

The reasons I thought a trust might be a good idea are:

1) I don't think he wants to give the flat away entirely. By being one of five beneficiaries he can retain some benefit from the rent.

2) It is quite likely that a 'less financially sensible' sibling would be tempted by an instant pot of gold. The prospect of having to find hard cash to buy them out is not an attractive one so preventing the forced sale by starting a trust with strict conditions behind it seems potentially sensible?

3) My sister is under 18 and would arguably benefit from being provided for when she's a little older rather than now?

4) The running of the flat might be easier with a formal trust in place, rather than the informal agreement of 3 separate owners?

If I don't quite understand how this works, please correct me

Thanks again,
Ben.

ben.bayliss

weekend bounce! any more comments hugely appreciated. want to try and sit my dad down to talk about all this asap.

Cook_County

A trust could be created under deed of variation as well, however you would be adding legal fees, a possible tax charge on setting up the trust, every 10 years and on termination.

If your dad sets up the trust it will be caught by the settlor interested trust rules which are becoming more complex this April.

The property could be owned by a LLP, with a well drafted partnership deed so the "owners" would find it difficult to withdraw.

Do bear in mind that - emotions aside - the capital value may fall, and there will be annual costs such as repairs, tax and tax advice which will need to be paid for.

I know you say not, but I would sell so that there is cash available to put your sister through college/uni & for your dad to pay off any mortgage or debts he may have.

CLAPTON

I think your father ought to decide what he wants to do with his money.. both now and when he dies

Has he written a will
Is he of an age or health that he's likely to die soon
Is your mother / his wife alive
Is his particular rich or with very complicated circumstances

Many people have daughters under 18 years without feeling a need for a trust to be set up.

The oft talked about discrectionary trust was a device to enable offspring to benefit from their parents joint IHT reliefs but thats no longer necessary.

Trusts cost money and introduce inflexibilities .. do his circumstances justify these problems


As I said get him to clarify exactly what his wishes are... maybe trusts just dont come into it.

ben.bayliss

Thanks again all. It seems perhaps my ideas of what a trust was, and how they could be run were misguided. Indeed, now the IHT pools of my parents can be easily pooled without complex will arrangements there isn't such a massive urgency (obviously this wasn't the case when my gran died).

My dad is healthy and should be with us for a good while longer, as is my mum so plenty of time to sort things out and start considering gifts etc... They already have wills (although not updated since this extra property came into the equation, nor updated since the new IHT limits were introduced).

We'll have a long chat about it later, but as I said before my reasons for posting this aren't to try to pressure him into any decision, more just help inform him as to what his options are and what consequences they have. He just doesn't have the time to be researching this kind of thing by himself (by his own admission, he's not great with his money!).

Good points about selling, but I think the reasoning for not doing so is that the property is in an excellent location so whilst it may depreciate, it will always be a desirable property, and a regular income might be more 'useful' than a lump sum now which could get squandered away (altho paying off the mortgage is an interesting point which for some reason I'd forgotton(!) - I'll be sure to mention that).

So plenty of food for thought all around - thanks again!

moon-pig_2

If your parents' combined estates including the inherited flat exceed £600,000 then a Deed of variation may be worth considering. The trust itself would pay income tax (rather than the beneficiaries), and as has been pointed out would incur legal/taxation costs which could outweigh the flexibility.

If their combined estate is still beneath £600,000, then your dad could simply retain control of the property and pay less income tax on the rent by giving the property to your mother (assuming she's a lower/non-tax payer).

Capital Gains Tax is a consideration, but will only arise if she sells/gifts the property in her lifetime - ie there will be none if it passes in her Will.

Unless there's any facts that differ from what you've told us, I feel it's best to keep things simple.

ben.bayliss

Indeed. We had a very long chat last weekend and are going to keep it very simple. My dad will keep the flat and rent it out for a few years, and re-consider selling it in a few years time. The rental money is extra income that he's never had before, so is keeping some (post nasty tax-man!) and using the rest to help put my sister thru uni, and slightly overpay my mortgage each month - which itself adds up to a significant 'gift' with all the interest it will safe despite being small amounts.

Their combined estate is now worth over the IHT threshold (to the tune of the value of the flat, really), but hopefully they've enough years left in them that it can all be planned in due course without nasty surprises down the line.

...Next challenge is to help him NOT get ripped off by lettings agents, and not spend too much redecorating a flat that he doesn't have to live in!