CGT/Inheritance Tax

DavidLaGuardia

CLAPTON wrote: »

anyone who is left a house and

The new law about 600,000... in fact this is exactly why splitting it into tenant in common is a bad idea...

however, had the left the house as joint tenants
on first death there would be no IHT on the 200,000 as its less than the allowance of 300,000 but 2/3 of the allowance was been used
on second death the estate is worth 437,000 (full value of the house)
but allowances are 312,000 for granny plus 1/3 unused by pop so allowances are 312,000 plus 1/3 of 312000 = 416000

so tax is 40% of 21,000 rather than of 137,000... too late now however.

Wht is it too late? Ever heard of a deed of variation? This can be used up to two years after death to alter wills and split tenancy (to revert to a joint ownership is not necesasry since the deceased's half can simply go to the survivor).

Additionally if the full £300,000 is gifted (including £100,000 in the value of the house. We split the owenership of the house for the purpose of long term care planning.

CLAPTON

DavidLaGuardia wrote: »

Wht is it too late? Ever heard of a deed of variation? This can be used up to two years after death to alter wills and split tenancy (to revert to a joint ownership is not necesasry since the deceased's half can simply go to the survivor).

Additionally if the full £300,000 is gifted (including £100,000 in the value of the house. We split the owenership of the house for the purpose of long term care planning.

quite right, a deed of variation should be considered.

harryhound

Don't forget all the beneficiaries have to agree to a deed of variation.
If any of the beneficiaries are minors, permission of a court may be required.
In the case of my late mother, I think she was intending to take the house with her when she departed this world.(said slightly tongue in cheek). A deed of variation is a "long stop" not as good as doing the planning while everyone involved can still be rational.

dawna_2

localhero wrote: »

Hi Harryhound,

I am not familiar with this CGT concept of a generation ago - though Jimmo would probably put you right on that.

But on your second point - where widow(er) is living in (let's say a £600,000) main home where the first half of the house has been left to the children.

Then (and this is the crucial part) if he/she has been left a life interest, then if they downsize then any gain will be free of CGT.

If there was no life interest (and the kids therefore could demand their share on first death), then CGT would be incurred if the property got sold later and it wasn't the kids' main home.

And yes, the whole house would also be protected from nursing fees.

After the 'Osborne budget' most of my clients who had discretionary will trusts have switched to this type this type of Will because of its versatility. (As well as the fact they already owned the property as tenants in common).

It is arguably better than the discretionary trust as it's not only IHT efficient, but it safeguards the entire home rather than just half of it. It is also cheaper/simpler to maintain the trust between first and second death.

Unfortunately I missed the radio 4 programmes.

I am quite interested in this. My trust knowledge is out of date now, but can you explain how both shares would be protected from home fees if you gave a life interest in only one share. The survivor would still own the remaining share outright.
Also, I have had a look at your website and you recommend a protective property trust.
Do you mean a protective trust.
This trust is life interest, but reverts to discretionary on the event of the life tenant's bankrupcy, or attempt to sell their life interest.
Step members recommend a fully discretionary trust in these circumstances.
What is the advantage of the IiP?
Why is the life interest trust cheaper to maintain than the fully discretionary?
When I did trusts they were similiar execept for the charges involved in calulating the IHT during the life of the trust, and also exit charges. But even those were marginal.
If all you had in the trust was a house, there would be minimal charges anyway.
Also, why will it be CGT free only if they downsize?
The PPR exemption applies regardless, and even up to the death of the trust beneficiary.
Hope thats not too many questions, but am quite confused by your answer.
Thanks

localhero

Hi Dawna,

If a right to remain (or life interest) is given in a Will to the surviving spouse, and they subsequently require long term care, they would be means tested. Any asset including the home would be included.

Where they own a share of the home, then the market value of that share is arguably nil (or next to nothing). This is on the basis there would not be a market for half of a house part owned by others not willing to sell. The whole house, rather than just half of it would therefore be protected.

The protective property trust is not the same as a protective trust. It is far simpler than that. It is simply a way to pass on a property (to blood children usually) where there is a desire to safeguard the property from long term care fees or the surviving spouse remarrying/having further children.

Before the IHT changes, this type of arrangement would not have been IHT friendly and so the discretionary trust whose main motivation was to utilise 2 nil rate bands would have served the dual purpose of safeguarding (at least the deceased’s) share of the home from long term care fees (or spouse remarrying etc).

A life interest would be preferable to the discretionary trust, in that there are no annual tax returns, 10 year anniversary charges, exit charges or annual meetings for the trustees to worry about.

These to the ordinary family would require in most cases ongoing legal advice which obviously comes at a cost.

When/if the surviving spouse chose to sell (for whatever reason) then any increase in value would not be subject to CGT. The example I gave about downsizing was in response to a question raised from Harry.

No, you haven’t raised too many questions. It’s an important issue and if by discussion it raises awareness to ordinary people of what can be done, then that is no bad thing.

Thank you for taking the time to look at my firm’s website – any constructive comments are welcome (either on or off the forum).

As my site also makes clear, this is not a one size fits all solution. Everybody’s Will should be tailored to their individual circumstances and there’s no substitute for face to face professional advice.

Kind regards,
Localhero

dawna_2

Sorry more questions LocalHero.
What legal prededent is there to say that the value of the survivors house is zero, or next to zero?
Why do STEP recommend a discretionary trust whereas you in effect are recommending a simple life interest trust - which is all that the protective property trust can be if it is not a protective trust.? STEP regard an Iip as more vunerable to attack, given that value of an IiP trust is included in the estate of the life tenant for IHT and hence could be argued to be vunerable for LA funding.
The Inland Revenue still require a return for an interest in posssession trust, even if there is no income from the trust, or the income is mandated directly to the life tenant.
There is no income producing asset in the trust, so there should be no difference in the tax return for a IiP or DT.
The requirements for trustees meetings is exactly the same for both kinds of trusts.
The only difference would be the 10 year charge and the exit charge computation (if trust assets were high enough)
CGT is not an issue as the PPR exemption within a trust applies to any beneficiary entitled to occupy the property.
Why do you think an IiP is better than DT for this when STEP do not?
Thanks for this.

localhero

Hi Dawna,

Yes you are certainly interested in trusts aren't you? Perhaps you might like to explain your interest. Are you a member of the legal or accountancy profession and deal with Wills and trusts yourself, and if so, are you or your firm a member of STEP?

dawna wrote:

The Inland Revenue still require a return for an interest in posssession trust, even if there is no income from the trust,

That's not the case. Where a trust includes property that doesn't provide an income the trustees should inform Revenue and Customs that an annual return isn't required.

dawna wrote:

The requirements for trustees meetings is exactly the same for both kinds of trusts.

That's interesting. Could you explain how often the trustees for a life interest trust must hold meetings and for what purpose?

dawna wrote:

STEP regard an Iip as more vunerable to attack, given that value of an IiP trust is included in the estate of the life tenant for IHT and hence could be argued to be vunerable for LA funding.

If a widowed spouse owns half of a property and has been given the right to occupy the surviving spouse's share of the property, on what basis would that make the property vulnerable for local authority funding?

dawna wrote:

Why do you think an IiP is better than DT for this when STEP do not?

I can't answer for STEP, but with regard to safeguarding the property from long term care fees, I can say that the property trust wills that I write day in, day out for my clients have been tested by the courts and DO protect the entire home from care fees. Anybody worth their salt in the Willwriting profession will know what case I'm referring to for the precedent.

If you are not familiar with the case yourself, I can recommend an excellent course run by the Institute of Professional Willwriters that will bring your Wills and trusts knowledge up to date.

As I stated in my previous post, there is no one size fits all for individuals' Wills. In some cases a discretionary trust will be more suitable and in others it won't. Everyone's Will should be tailored to their individual ciurcumstances by a competent professional following a face to face consultation.

Kind regards
Localhero

dawna_2

Hi Local Hero,
Thanks for your input.
Yes, I am a solicitor, but have not been involved in trusts or wills for a number of years. My practice does not get involved, as we are a specialist pracitice and do not have the expertise. My interest is from a personal point of view.
Thanks for the recommendation about the course, but in the event of needing some expertise, we would probably go down the STEP route, but we would have no need to at the moment.
STEP members recommend DTs because they regard IiP trusts as potentially vunerable because of the reasons I gave. ie The life interest is part of a persons's estate for IHT and therefore the LA may argue it is also part of their estate for care home funding. Whether or not the LA have argued this I could not say, but they believe the threat is there.
You mention that there is case law to say that the value of the survivors share is nil for care home funding if there is a trust for the other half. Could you tell me what that case is, as I would like to read it.
re: the point about trustees meetings. There is no requirement for any trustees to have meetings, whether the trust is discretionary or not. Some do, some don't.
I have seen trustees in Life Interest trusts have meetings to discuss the investments, or if they have the power to appoint capital from the trust, whether to appoint the capital.
In both cases, it depends on whether or not there were reasons to meet, or whether there were professional trustees.
Thank you again for your input.

insured

I am quite interested in this discussion.
Are you saying Localhero, that your protective property trust is just a life interest trust?
Incidentally, dawna is right about the trustees meetings. The requirement to have trustees annual meetings is no more onerous on a DT than on the trustees of life interest trusts. It depends on what is in the trust. If all that was in there was a house, then there would be really no need for meetings.
I am also interested in the case law to support that both halves of the house are protected because each half has a nil value.
The local authority cannot force a sale, for sure, but they can place a charge on the house.
You say that there is precedent to support that, could you quote it please, so that I too can look it up.
However, what I cannot understand is for example the survivor goes into long term care. Has one of these trusts. They would surely never be able to rent it out or sell it whilst they are in care if this is the case, because if it was sold, the survivor would have their share in cash, or even if rented out, the survivor would be entitled to half of the rent.
Even if your arrangement worked, then surely they would have to sit on the house, and maintain it until death?

Baggysdad

The case law is Special Commissioners v Palfrey.

It stated that the value of a share of a house of a resident needing care was Nil when the co owner did not want to sell.

The contention that it is only applicable if the house is not sold while the surviving property owner is in care is correct.

B