avoid inheritance tax on the family home

[outsider]

My father passed away last November leaving his estate, including the family home to my mother. My mother’s estate now has a IHT liability looming which we obviously want to reduce if at all possible.

My understanding was that one approach would be to take the house out of my mums estate immediately for IHT purposes by use of a Deed of variation that puts the house into a discretionary trust with my dad as the settlor. The house thus being in trust is never in my mums estate liable to IHT.

We obviously want her to continue to have the house as her main residence.

My understanding is that she should be one of the beneficiaries of the trust, and as such this will help avoid CGT when the trust eventually has to sell the house by virtue of the fact the house was the main residence of one of the beneficiaries. I was also under the impression that doing this would also avoid any gift of reservation and long term care problems should they arise in the future.

Will this strategy work? Are there any alternative strategies we can use to remove the house from my mother’s estate for IHT purposes.

Thanks in advance

[maths]

This may not necessarily be the best option to follow.

The size of father's estate and that of the mother following the father's death is relevant as is the identity of the ultimate beneficiaries.

How old is the mother and the beneficiaries.

[outsider]

thanks for the reply.

My mum is 68, and beneficiaries would be her 3 kids, all in the 40's.

My whole estate went to my mum. We are currently looking at a IHT bill of 200k+. As far as i can tell, taking the house of the equation would significantly reduce this liability.

Cheers.

[maths]

Can I just check that you are aware that mother's estate will be entitled to a nil rate band of £650,000 not just £325,000 ?

[pqtaxation]

.... My (father's?) whole estate went to my mum. We are currently looking at a IHT bill of 200k+. As far as i can tell, taking the house of the equation would significantly reduce this liability.

Just to expand on maths' query.

As your mother inherited all of your father’s estate, there should be his nil rate band (NRB, currently £325k) available to transfer (assuming he made no non-exempt lifetime gifts to others) and so your mother’s estate will have two NRBs. Hence for her to have a IHT liability of about £200k, as you indicated, her current estate would be valued at about (650+200/0.4)= £1150k.

If that is right and as your post says that the family house accounts for the much of that value, one the obvious approach to IHT mitigation at her age (assuming good health) would to downsize to a cheaper home and thereafter gift some of the released capital to her children (in the hope she lives for seven years after making the gift). There are of course otherways to mitigate the liability to IHT on her death.

[outsider]

>>My (father's?) whole estate went to my mum. We are currently looking at a IHT bill of 200k+. As far as i can tell, taking the house of the equation would significantly reduce this liability.
should have read;
"My fathers whole estate went to my mum. We are currently looking at a IHT bill of 200k+. As far as i can tell, taking the house out of the equation would significantly reduce this liability."
thanks for working round my bad typing.

Yes i'm aware of the two NRB's and your calc's are just about correct.

The house equates to approx a 1/5 of the total estate.

She doesn't want to downsize any time soon, if ever.

Thanks.

[pqtaxation]

..... Yes i'm aware of the two NRB's and your calc's are just about correct. The house equates to approx a 1/5 of the total estate.

She doesn't want to downsize any time soon, if ever.

So, if I understand you correctly, your mother’s total estate is about £1.1m and the house is valued at about 20% of that total, about £220k.

Hence assets other than the house account for 80% or about £880k and mitigation/extinction of liability to IHT would address reducing the value of other assets assessable to IHT by about £450k so as to lower total estate assessable to IHT from about £1.1m to £650k. As you wrote that the removal of the house would achieve this, I did have the impression that the house accounted for the majority of the value of her estate but it does not. So downsizing and gifting has less effect on mitigation of liability to IHT even if she would be willing to do so (which you write she does not).

But estate strategy planning for your mother should be conducted in a holistic way – her wishes, age, health, life expectancy, pension and investment income, value and nature of assets, etc.

In essence to mitigate the liability to IHT on her death, if that is what she wants to do, she can either remove assets from her estate or exchange assets into assets which attract relief/exemption from IHT (e.g. farmland, woodland, AIM listed shares, shares in unquoted trading companies etc).

My suggestion is for your mother (and you and/or your siblings at her invitation) to discuss her wishes with a specialist lawyer and financial planner to be reflected in her will and agree the lifetime plan for her assets and her lifetime income.

[maths]

You suggest the execution of a DoV by mother with respect to the family home under which the home becomes settled in a discretionary trust (under which presumably she plus kids are beneficiaries).

To be effective for IHT this would require that she could not be regarded as acquiring an "immediate post death interest (IPDI)" in the home effective on her husband's death; if she does then the house remains in her estate for IHT and nothing is achieved.

Execution of the DoV within 2 years of death could give rise to the above problem if "back-dating" applies for IHT under the DoV.

Execution without "back-dating" for IHT solves the IPDI problem but causes the transfer into trust to be a gift with reservation and again no IHT is avoided on mother's death.

Whether deferring the assent of the house into trust beyond the 2 year period following death solves the above IHT problems may be arguable.

This is an area where sound advice should be taken as it is fraught with problems; it may be other options are preferable.

[pqtaxation]

You suggest the execution of a DoV by mother with respect to the family home under which the home becomes settled in a discretionary trust (under which presumably she plus kids are beneficiaries)........

This is an area where sound advice should be taken as it is fraught with problems; it may be other options are preferable.

I'd had assumed in my last post above that in view of your (OP's) disclosure that the house accounted for only around 20% of mother's estate, implying a valuation of about £220k, and mother's clear wish to remain there that any approach she wanted to take concerning mitigation of IHT payable on her death would focus on the rest of her estate and the house would remain in her undivided ownership. Maths' comments could be read to encourage my assumption.

It would be interestesting to learn from OP later on what mother does decide to do (and why) as the subject of his query is a frequent one on this bulletin board.

[cturner]

I had a similar query recently - and still have not resolved. Doing a DOV to put the house in a Discretionary trust would use up part of father's nil rate band would it not, so does it really save anything in IHT(other than the groth of that trust. I am interested in whether this assumption is correct? .