planning IHT

theGrinch

Sorry if this question has been asked and answered recently, but as everyone's circumstances are slightly different I really wanted a more exact answer.

my mother is in her mid 60s and owns a house; valued at £360k.

We are starting to look for ways to plan IHT so as to minimise it.

can anyone suggest ways on how we can achieve this?

thanks

sneekymum

I'd like to point out that I'm an amateur enthusiast in IHT and my suggestions are not advice......anyway.......

1. If she's likely to survive seven years (or the best part of) then the simplest way is to take out a lifetime mortgage (not sell part of the equity) - giving you (plus siblings?) a lump sum "without reservation" which you may well chose to keep safe in case you choose to give it back. These lifetime mortgages build up the interest as a debt to be paid out of the estate upon death. With wise investment its likely that the lump sum can grow at an equal or better rate.

But mum is still young - the mortgage may go on for years - one day the council may expect her to sell the house and pay for care - the IHT threshold may rise beyond the house's value.

2. Another route is for her to give you a big share of the house - and then survive seven years (or the best part of that). To avoid the "pre-owned assets rules" she should pay you a true market rent for use of your part of the house - which you will declare as income on a tax return and be taxed for.

3. If she's not going to survive seven years then you can take the above route but instead of getting a share of the house as a gift you coud get a mortgage to buy a portion at a true market value (& then charge rent) - there's no IHT to pay on a purchase...The money you pay her for your share might 'sadly' all be spent by the time of her death and not form part of her estate.

Having the house in more than her name prevents it being sold to pay for a care home - well you can put it on the market but who'd buy her bit if you won't sell?

3. & 4. will eventually lead to Capital Gains Tax charges should you one day sell - which may end up being more than any IHT due depending on thresholds and rates at the time.

margaretclare

Hi

I agree - mum is still young, things can change a lot. I was widowed at 57, met my new love at 62 and remarried at 66. I could have made a lot of decisions in my early 60s which would have turned out to be wrong.

Having said that, I am a great believer in using the immediate post-retirement years to take a good hard look at everything - which you and your mum are doing. First among my own thoughts would be - does she really need a house valued @ £360K? Wouldn't it be better for her to sell it and move to somewhere more manageable, somewhere that will be comfortable in her later years. Not necessarily sheltered housing - just somewhere a bit smaller, easier to run, easier to cope with.

I know a lot of people on these boards say they don't want to - it was the family home, it's full of memories etc. Well, at the end of the day it's only bricks and mortar. It's what's inside the home that's important - the love, the concern, the family mementoes, little heirlooms etc.

I would take my own advice, only - aged just 70 now - there's nowhere to 'downsize' to from a 2-bedroom bungalow!! We have spent quite a lot of time and effort in streamlining garden, updating kitchen and bathroom etc, all with our present and future comfort and convenience in mind. Luckily we don't have stairs to cope with! I moved here with my late first husband in 1990 and we had those thoughts in mind even then (he died 18 months after we moved here).

Comfort, convenience and peace of mind are worth all the gold in Fort Knox!

Aunty Margaret

sneekymum

Spot on Aunty

And I remember another post of yours where you say "What if mother remarries?"

In our own case there's enough money washing about for it to actually attract a gold digger - but we have taken this possibility on board. My mother's mother lived to 99 - and so my own mother (at 67) may have 32+ years left with a toy boy - and good luck to her.

Arranging things so that mother has to survive seven years for any IHT planning to work is much more positive than waiting for some nifty move on a will to come into force. We are actively prolonging mother's life by forcing her to walk over a mile to the local pool four times a week and swim 20 lengths. We've got her down to 8 stone and ensure that she has happy thoughts and lots of holdays and days out - just yesterday we booked her on a two week arctic cruise. The main point should be that mother has as long and happy life as possible - saving tax is a bonus.

margaretclare

sneekymum wrote:

And I remember another post of yours where you say "What if mother remarries?"

In our own case there's enough money washing about for it to actually attract a gold digger - but we have taken this possibility on board. My mother's mother lived to 99 - and so my own mother (at 67) may have 32+ years left with a toy boy - and good luck to her.

The main point should be that mother has as long and happy life as possible - saving tax is a bonus.

Hi sneekymum

I said 'What if mother remarries?' because the younger generation often don't think of it as a possibility - they tend to think of losing their inheritance if/when she goes into a care home, which may be a decade or two ahead if ever. To them, she's 'mum', always been with 'dad', is impossibly old and past any thought of a life of her own.

But as happened with me, sometimes a new love comes 'out of a clear sky' as they say! When I was widowed at 57 it never occurred to me that 5 years later I would fall in love all over again, and 5 years after that, would remarry.

I've often jokingly remarked to B that he should have found himself a rich widow! - because rich I certainly wasn't. But I did have the roof over my head even if it was still mortgaged. We have no need to worry about IHT but we're comfortable, not rich but a long way from being poor, which I think is the happiest state to be in.

Your mum may meet a lonely man her own age-group on that cruise - good for her, and good for you!

Aunty Margaret

sneekymum

I might mention I'll be there too (and I'm paying for myself) - for seeing that midnight sun is one of my life's ambitions. Though she'll get plenty of room from me to find romance....

theGrinch

Thanks for the time and advice.

Firstly, I would like to say that mid 60s is no age at all. In fact, my neighbour is very indpendent and he is in his early-90s!

But I would go on and say, that it is never too early to start planning when you are talking years or decades for qualifying. The sooner you plan the better and you can then adjust when circumstances or legislation changes.

Can you confirm that for the purposes of IHT, you subtract the mortgage from the value of the property? So if the property was valued at £350k with a £100k mortgage then the assessable amount for IHT would be £250k?

Is a lifetime mortgage different to a standard mortgage and if so how?

If she gives the property to me would this give rise to immediate gift tax issues?

Can you explain how the 7 year survival rule works?

Aunty Margaret, if the property was sold and downsized wouldnt that keep the assets at the same size be it a different mix of property and cash? Are you then suggesting that in downsizing and holding more cash that over time that cash could be "given away" in a tax efficient way?

Thank you in advance for your general advice.

margaretclare

Hi, no, I was thinking more along the lines of convenience etc when I suggested 'downsizing' - I hadn't really thought through the tax implications. It's just that I've seen so many older people (older than your Mum, I mean) who say things like 'of course the house is too big now, it costs a lot in upkeep, fuel, repairs etc, the stairs are difficult, I can't cope with the garden any more but......(and this is the big but!) it's too late now, I couldn't cope with the upheaval, I wish I'd done it years ago when I was younger and fitter'. I've heard this kind of thing said so often, that's why I feel so strongly about it.

About 'lifetime mortgages' - this is a form of equity release. You borrow against the existing equity at current valuation, the interest rolls-up and the loan, plus rolled-up interest, is paid off from sale of the property. Obviously this has to be paid off first and results in a smaller total estate!

We did this because we wanted to pay off the original mortgage. We have security of tenure until the second of us departs this mortal coil, the house gets sold, the heirlooms in it given to my daughter and my library given to my brother, and any money left over split between our 5 grandchildren (3 of mine and 2 of his) - that's my second husband, of course.

If your Mum borrowed against the equity of course she could spend the money, thereby having less to leave behind to be taxed, and of course she could give it away or do what she wanted with it. Have some fun with it, hopefully!

Aunty Margaret

. But of course,

sneekymum

Just cos I like answering IHT questions...



Can you confirm that for the purposes of IHT, you subtract the mortgage from the value of the property? So if the property was valued at £350k with a £100k mortgage then the assessable amount for IHT would be £250k?

Yes - but you'd only need a £75K mortgage to take the house down to £275K which is the current exempt value -........ has mother no other assets?

Is a lifetime mortgage different to a standard mortgage and if so how?
Aunty Margaret covered that one.

If she gives the property to me would this give rise to immediate gift tax issues? Hey, what's "Gift Tax"? Lots of people say "I'd love to help my kids out but of course you're not allowed to give big sums of money away" ..- of course you are. Perhaps you mean Capital Gains Tax? - This does not apply to the house if its her main residence. If she gave you a holiday cottage than that would have to be assesed as if it was sold at the true market value and then she (not you) would have to pay tax on any profit she'd made since buying it.

Can you explain how the 7 year survival rule works?
Yes.
Give something away and survive 7 years then its not counted as part of your estate for IHT. Die before the time's up then there is taper relief so that depending on when, not all of the 40% applies. The biggest benefit is that the tax is taken from the residue of the estate and not the gift (unless there's not enough residue left). This can be helpful to those left behind as if there's any tax to pay they wil have the means to pay it. Otherwise a circus act can follow whereby the estate cannot be distribted until the tax is paid and the tax cannot be paid until the estate is distributed. This doesn't happen often but there have been cases of people remortgaging just to pay that tax and get their inheritance.

Aunty Margaret, if the property was sold and downsized wouldnt that keep the assets at the same size be it a different mix of property and cash? Are you then suggesting that in downsizing and holding more cash that over time that cash could be "given away" in a tax efficient way?
Well yes - she could start giving away £3000 each year with no IHT risk. Or she could give more and survive (or not, either way still helpful - see above). If mum was intending to make a gift to charity then it would be better to do it in the living years when the charity could claim back tax (if mum's a tax-payer) and such a gift would still be IHT-free as gifts to charity are. Another tax-effective IHT dodge is to start a stakeholder pension. Anyone can have one (£3600 gross, costing just £2808) up to age 75. The IHT benefit being that if she dies before an annuity is bought then the pension pot goes straight to a named person and not into mum's estate. And she can always take 25% out tax-free for that cruise....

margaretclare

Hey, I'm glad you mentioned the stakeholder, although I wouldn't have thought of it in this context. The taxman adds 22% to your contribution, and the whole lot 'grows' in the fund or funds that you select. I'm doing this, and it has another 5 years to run until I'm 75. We may well go on a cruise of our own then, sneekymum, using the 25% tax-free lump sum, or at least we plan to have a damn good holiday.

Aunty Margaret

theGrinch

once again thanks for the considered replies.

like most people, I am not an expert in the field of IHT and again like most people I know bits and pieces (I often think govts like to confuse people into inertia).

let me be 100% clear here can a parent gift significant sums away to children with no tax implications i.e. no gift/transfer taxes or income tax implications?

If this is the case why is IHT ever paid (voluntarily)? Also if this is the case are the rules for cash give aways different to that of gifting a PPR? Finally, I assume if you gift something you can not then go on to have a benefit from that cash or asset....is this correct?

you have both been very patient and helping.