Inheritance Tax: Save £100,000s with simple advanced planning Article Discussion

angelika_2 · 9 July 2007 at 9:54PM

Dear Salord

Many thanks for the information you have already given me I've sent it off to my parents. I think the main concern that have is that they don't own a property in the UK it is all cash in the bank - their main home is currently in Germany, does this make a difference?? I don't seem to be able to find any information on this sort of thing on the website but maybe I've missed it.

Many many thanks for any help given.

Angelika

angelika_2 · 10 July 2007 at 2:03PM

Dear Salord

I just want to say thank you so much for your help - it has been most useful

kind regards
Angelika

localhero · 15 July 2007 at 6:06PM

There remain some unanswered questions so here goes:

Saveforarainyday - 20k for IHT planning on a 400k estate is outrageous. I don't know exactly what Lloyds have set up, but what your parents needed was to ensure they own their home as tenants in common (rather than the usual joint tenancy in which it automatically passes to the other) and a will.

Schemes put around by ifas, banks & b/soceties are nearly always expensive, complicated and unnecessary, so avoid them.

There are banks out there who offer cheap/free wills as part of some account package, but usually you don't get face to face advice by an expert, and they almost always appoint themselves as executors allowing them to charge around 4% on your estate when you die. (£16k & VAT on £400k estate).

solution - traditional method is to see a solicitor. However they tend to have rather vague fee structures (or otherwise just expensive), you usually have to go to them and since they don't have to pass exams in willwriting, there's no guarantee they will be any good.

Willwriters have a poor reputation because there are many cowboys out there. That's why for your protection get a will writer who is a member of the Institute of Professional Willwriters. To become a member they must pass an exam on wills, they must stay up to date with the law, their conduct is regulated and they have professional indemnity insurance. They will usually provide home visits and they have fixed fees. See www.ipw.org.uk for a list of members in your area or call 08456 442042.

Apart from owning their homes as tenants in common, your parents should consider leaving their nil rate band to a discretionary trust instead of to the children. Shop around as fees vary. Expect to pay between £300-£900. Heritage legal services in london charges £375 all in.

Harryhound - splitting the house into tenants in common is the first part, you then need to go on and make wills to determine where the share of the house goes, because otherwise under the rules of intestacy it could pass to the surviving spouse, which then creates a future liability for tax. (And defeats setting up the tenants in common arrangement.)

The choice is 1) leave share of house (and other assets up to £300K to childen; or 2) leave share of house etc to a discretionary trust.

I would not advise leaving it to the children for the following reasons:

1) Upon death of first parent - any of the children would be entitled to their share & force sale of house;
2) Even if they didn't and they waited for 2nd parent to die, if they own other property, they would face paying CGT on parents house;
3) If they get divorced/go bankrupt the asset is at risk.

so all in all surviving parent does not have peace of mind.

By leaving the nil rate band into a discretionary trust, upon first death the surviving parent is able to borrow it back - so if it's the house they become the sole legal owner and continue living there. (At the discretion of the trustees.)

They are then completely protected from children's demands, divorces and bankruptcy. Usually when they die, the trustees wind up both estates and children get the assets (£600k tax free - saving up to £120k).

The other advantage of owning the property as tenants in common, is that if surviving spouse goes into a care home they are means tested, so as they don't own the whole house, a large proportion of the home has been saved from the liability to the fees.

Colink - as above. Holding the property as tenants in common does not allow one party to sell without the consent of the others. Any dispute will ultimately be settled by a court. To avoid this costly problem, where a group of people club together as t.i.c. I would advise they form an agreement beforehand as to what happens when one wants to sell, that way everyone is clear at the outset.

Where parents own as t.i.c and a share of the property is left to children then, yes they are entitled to force sale on first death. (Unless a life interest has been given to surviving spouse - which is not tax efficient).

I don't understand what you mean by can the scheme be reversed. They can convert back into joint tenants if they wish, but I can't see any advantages to that.

Paysa - to find out if you own your home as t.i.c., when you originally bought, your solicitor should have given you copies of the 'office copies' held at the land registry. If you've got them look at the proprietorship register and there should be a restriction saying 'No disposition by a sole proprietor (other than a trust corporation) under which capital money arises is to be registered unless authorised by an order of the court'.

If you don't have the copies, then go to www.landregisteronlinegov.uk and enter house number & postcode and request a detailed enquiry, pay £3 and you will instantly receive the office copies.

If the restriction is there you own as tenants in common, if not you own as joint tenants, in which case you will need to convert it if you wish to change it.

Snappit - Pre-owned assets tax is a murky area. Essentially if someone makes a gift during their lifetime (ie their house let's say), they must not continue to benefit from it. In that scenario they would be expected to pay a market rent if they continued to live in it.

So in the case of the holiday home or the picasso painting, ownership must genuinely pass (and not continue hanging from parent's drawing room). Otherwise for IHT purposes it will be included as part of their estate however long after they made the gift. The rules are similar where money has changed hands.

Take a look at http://www.hmrc.gov.uk/poa/poa_guidance5.htm#1 for further guidance. If still in doubt seek professional advice.

For further info on wills visit ipw.org.uk Hope that helps.

Misstique · 15 July 2007 at 8:23PM

Hello all

Inheritance tax advice always seems to relate to those who are married. Can anyone provide advice or where to seek advice for someone who has a substantial estate but is single?

Many thanks

localhero · 16 July 2007 at 12:17AM

Hi Misstique,

Since single people have only 1 tax threshold available, currently £300,000, this makes inheritance tax planning a little more difficult.

That said, it is not impossible. There are some generous allowances and reliefs available. These are chiefly:

1) Business Property Relief - certain types of business asset owned for 2 years at death can be left completely free of inheritance tax. As can -
2) Agricultural land
3) Gifts to charity
4) Gifts during your lifetime if you survive 7 years - all exempt, subject to certain conditions.

There are other allowances available, but these are the main ones.

harryhound · 20 July 2007 at 8:30PM

Hi localhero,
You seem to be knowledgeable about the world of trusts. Here comes a mammoth posting as I try to explain what I think I have learned about the world of trusts. I could then go back and correct my mistakes in this posting.
I am in the process of needing to rewrite my will: I had left my half of the house, which my wife and I own as tenants in common, to my children; in the form of a maintenance & accumulation trust until the age of 25. At the time they were reaching this age of wisdom (?) dear old Gordon Brown decided to cut the age to 18. (Anyone out there with mature and sensible 18 year olds?).

My motto is “don’t sign it unless you understand it”; advice that some pension and endowment investors may wish they had taken.

I know the rudiments of English law, partly by studying at night school and partly by experience. A wonderful concept is minimalist judge made English law. Originally I expect the law only recognised individuals but other legal personalities were invented. Perhaps the best known is the “company”, but we have the “charity” and others including the “trust”. This last named legality allows “the trustees” to own assets but they must apply the wealth accruing for the benefit of “the beneficiaries”; even if this is at detriment to them as individuals.

My old grandmother lumbered me, and an aged family friend, with keeping a roof over the head of a great aunt by leaving her in the house as a tenant paying 1GBP per year; with the eventual beneficiaries (us grandchildren) owning the house. When great aunt eventually died, I managed to get the capital taxes office to agree that this was a life interest in an “interest in possession” trust. As the house sold for a little over the (then) IHT zero rate band, even with its probate value aggregated with old auntie’s 20K nest egg, there was little tax to pay.

Dad, who owned ALL the family home, died intestate. When a parent dies leaving a spouse and children, the spouse gets the chattels (ie personal things) and the first x GBP but only a life interest in half the rest. (X is currently 125K when dad died it was about 8K) The taxman explains this quite clearly here: http://www.hmrc.gov.uk/cto/customerguide/page14-6.htm

Amongst ourselves we sold the goodwill of dad’s business (notionally for the 8K) in exchange for an annuity for mum and the house became the asset owned by another interest in possession trust. There used to be special rules for life time trusts left to a widow and for a roof kept over the head of a dependent parent, which protected the house from IHT & CGT.

Incidentally, being responsible for these two trusts, cost very little, once I had set up a simple accounting system. Perhaps two man days per year, the biggest chore was filling in their tax returns.

Unfortunately our high taxation government needs more pounds of flesh every year.
See here (are we Londoner’s surprised that we are cross subsidising the rest of you?) http://www.adamsmith.org/tax/Tax%20Freedom%20Day/Home%20Page.html)
Plucking tax from husband and wife on their deaths’ produces “the maximum number of feathers with the minimum of hissing”; so the rules were changed, especially in the 2006 budget.

So if you like me don’t want to be goosed by the taxman, we have to learn about trusts and their taxation.

In this thread, we are thinking mainly about ordinary people who need what they own right up to their death, rather than the really rich, who have spare money to give away while still alive.

I’m trying to understand the present situation with the help of the two “Which?” books called “Wills & Probate” and “Giving & Inheriting”. Now even “Which?” needs two books and has chickened out of offering pro forma wills [My mother died with a “Which?” will that was executed by son and daughter alone and did exactly what we expected it to do. Unlike grandmother’s costly, but out of date will, that turned out to be an expensive shambles]

On death the choices seem to be the traditional “Interest in Possession Trust” that protects half of the children’s interest from the “spending the kids inheritance now” syndrome that could occur with a gold digger or toy boy at a younger age or an old folks home at a later age, or financial incompetence at any age. However it now does nothing to avoid the IHT charge at the second death.

For children still in education there is the “Bare Trust”, very like the Government sponsored “Child Trust Fund “, but is giving a child a big slug of money for their 18 birthday a good idea? I think for some yes but for many no. This is the default situation if assets are left to children that they cannot own until they are 18. (There is some suggestion that the tax man could claim that this is really a discretionary trust and try to tax it accordingly OMG ?!)

The accumulation and maintenance trust no longer benefits from special tax treatment, it has been turned into another flavour of discretionary trust, to be replaced by the Bereaved Minor’s Trust, which has to be created by the death of a parent (not a grandparent for example) and loses its privileges at age 18. Should the trust carry on past 18 then it starts to accumulate IHT and by the age of 25 the assets could be facing an IHT levy of up to 4.2%.

So what is this animal called a “discretionary trust (zero rate band)”?

At death we are freed from Capital Gains Tax but face a 40% charge on everything after the zero rate band, currently 300K. So we can put assets worth up to 300K into a trust where the trustees have the discretion on when to pay and how much to pay to each beneficiary. The beneficiaries can be defined as a class of persons (eg “my grandchildren”). However as rich men could create a sort of legal clone of themselves the tax treatment of the trust is severe. Only the first 1000 is taxed at basic rates (10% divi’s 20% interest 22% other income.) the rest pays 32.5 percent for dividends and 40 percent for the rest. This rate applying to trusts (RAT) is similar to the tax paid by a higher rate tax payer. If the trust pays out to a lower taxed beneficiary, that beneficiary can claim back any over paid tax.

If the trust sells assets it is liable for CGT and it only gets a zero rate band that is half the size of an individual’s, so this year the first 4,600 of gains would be free of tax.

This trust animal cannot live for ever, but because it can live for a very long time, every 10 years the tax man comes after it for some IHT. This IHT is clocking up by 1/40th every three months. The 10 year charge appears to be 30% of the life time rate of a half price rate of 20% (ie not the normal 40%).
If any capital is paid out of the discretionary trust then it pays its accumulating share of IHT when it leaves.
Referring back to the Bereaved Minor Trust above, that has been allowed to run on for 7 years from 18 until age 25, the rate is 50% of 40% = 20% and 30% of 20% is 6% the 10 year rate BUT 7/10th of this is 4.2% QED (geddit).

However the trick seems to be to keep the trust down to 300K (at current rates) its zero rate band, so every 10 years the periodic charge for IHT is zero.

Setting up one of these animals in a will, can be useful as it allows the trustees (the mother and two grown up children say) two years to agree what to do with the assets left to the trust without any additional tax complications. A useful additional flexibility as it can often take two years to sort out everything anyway.

If it runs on then someone has got to administer it and report to the tax authorities.

The “Which?” guide gets uncomfortable about leaving half the family home to the trust? This would protect it against care home fees, but I think “Which?” is worried that mum will say “I want to move to a little seaside bungalow” and the trust will say. ”We don’t want to sell and run up CGT bills, we were rather thinking of demolishing the old place once you had gone and building two modern homes on the site”. “Which?” suggests a bit of a dodge, where the trust accepts an IOU from the mother in exchange for selling her its half of the home and collects on the IOU when the mother dies. Mother then dies with a whole house, possibly down by the sea, but also with a 300K (say) debt to the trust.

“Which?” also suggests an interest in possession trust, that is not an Immediate Post Death Interest-in-possession trust (IPDI) that somehow dodges round the problem of the trust’s value being included in the mother’s estate.

Harry.

localhero · 20 July 2007 at 11:08PM

Hi Harry,

Wow yes the post lived up to its billing. I followed the gist of what you're saying and it seems you have been busy reading up. The knowledge you have is actually factually correct and very impressive. IMHO you would make a great solicitor or willwriter as most sadly have a fraction of your knowledge on the subject!

The Which books are ok, but when it comes down to the nitty gritty you really do need to call on the services of someone clued up, as since you have discovered it is easy to slip up. Also most books from the library and stuff online is often unhelpful/contradictory.

I'm not sure what your question is, so I will give you a typical situation that I encounter all the time, and what I usually advise.

Scenario: John and Anne, married with 2 kids together, John has 2 kids from previous relationship. Their house is worth £550k, and they have some ISA's (so called tax free savings worth £50k. They worry about IHT and nursing home fees. John also wants to make sure none of his kids get overlooked.

Solution: They sever the joint tenancy on their home and own it as tenants in common. They each leave the maximum amount 'the nil rate band' that they can into a discretionary trust. The surviving spouse is a beneficiary with all the children (and grandchildren as well if you wish). You appoint 2 trustees who decide what happens to the trust.

The trust property can include half of the house or any other asset. When 1st spouse dies, the trustees can loan the surviving spouse the 300k, surviving spouse signs an iou or accepts a charge over the property. No tax on 300k. Residue (if any passes to spouse).

The spouse becomes the sole legal owner of house. The trustees meet once a year to decide whether or not to call in the loan, or advance capital to any of the beneficiaries. It is important that the will does not give surviving spouse an interest in possession, as if it does they will then eventually pay tax on that (sometimes referred to as a life interest.)

If the home represents the majority of the trust fund, there will be no CGT. If the trust fund grows to beyond the nil rate band then IHT must be paid periodically. (10 years/when capital is advanced).

When surviving spouse dies the trust fund at that point is distributed to children etc. Surviving spouse leaves their £300k in the usual way to children. = no tax. The overall effect is that they've saved £120,000 in IHT.

If surviving spouse went into a nursing home, they own half their home (which is arguably worth nothing on the open market) and much is kept out of local authority's grasp.

John's children also get an equal share of his estate as he wanted.

Accumulation & maintenance trusts, once popular with grandparents now defunct. The new version is not so attractive as they're treated in the same way as discretionary trusts.

One last word of advice, obtain the services of a decent willwriter. As I quite often advise, the Institute of Professional Willwriters has 500+ members who are regulated, insured and qualified. (I declare myself a member). For a member in your area visit www.ipw.org.uk. All other willwriters I wouldn't touch - far too risky. Fees do vary so shop around. They do provide home visits and fixed fees without hidden fees.

I hope that answers your question.

harryhound · 21 July 2007 at 4:57AM

Hi localhero,

Many thanks for this.
So far I have managed to avoid the step children problem:beer:

Next step is to get a roundtuit and make a statement of assets.

The only problem might be:
http://en.wikipedia.org/wiki/Alistair_Darling
He looks like another Scottish socialist, who thinks the state is better able to spend the nations wealth, than its citizens as individuals are.
Perhaps as we write, he has a team at work to claw back the savings that can be achieved by setting up a will trust.

Harry
.

margaretclare · 21 July 2007 at 10:12AM

Hi Harry

This is all very interesting. If more people bothered to read up in the way that you've done (information freely available out there from Which and other sources) perhaps we'd have less fatuous questions on here like 'can my parents give me their house but continue to live in it).

We've recently gone through all this because we're in process of setting up EPAs for each other, with our solicitor acting as second attorney in both cases. We discussed all the ins and outs just a few days ago with our known and trusted family solicitor and we don't yet have to worry about IHT. If/when we do (we're retirement investors!!!) then we'll look at it all again and make necessary changes. In any case, wills should be kept under review because things do change - not only personal circumstances, but legislation as well.

I found out quite by accident that we'd done the right thing when we drew up our wills after our marriage - if there are step-children or, as in our case, step-grandchildren, it's essential to name them in the will. We've named all 5 of them before we knew why it was so essential.

Don't even get me started on Scottish socialists. I am an English nationalist and I would like to see England's wealth spent on England.

Like you, I live in South Essex, the so-called Thames Gateway.

Margaret

margaretclare · 21 July 2007 at 12:00PM

sav4it wrote: »

Is that wise? Could get very expensive. Is there nobody in your family /friendship circle you would trust and do it for free if first attorney became unable to do the duties?

Yes, it's wise, and no, there is no one in our immediate family circle. I discussed it all in a thread headed 'EPA between spouses in the Silver Surfers' forum'. http://forums.moneysavingexpert.com/showthread.html?t=471485

I don't want to go over all that ground again, but basically (a) my daughter is 250 miles away, DH's son and daughter are 150 - 200 miles away and (b) things have happened in the family which convince us both that - no, there is no one we could trust 100% who'd do it for free. We prefer to pay a professional and in our experience, that's often quicker and cheaper in the long run. All the people we would have trusted 100% are now dead, and the only people we now trust 100% are each other.

Margaret

Inheritance Tax: Save £100,000s with simple advanced planning Article Discussion

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