Downsizing and Gifts to Sons

[pdonnar]

Mr and Mrs A have assets worth about £1.2M, mainly tied up in the family home. Their two sons have now left home and they wish to downsize in order to free up capital. From this, they intend to give each of their sons £125K to assist them in buying a property each.

Mr and Mrs A are both in the 60s with Mr A a few years older than his wife so statistically Mrs A is likely to survive him by 10 years or so.

How is it best to give this money to minimise any IHT taking into account the possibility that one or both Mr and Mrs A may die within the next 7 years. Solely from Mrs A to the sons? Jointly from Mr and Mrs A to the sons? Or doesn't it matter?

I realise that any IHT due would actually be taken from the estate and (presumably) not affect the sons directly, but this would disadvantage other significant heirs of which there are several.

Thanks for your help.

[pqtaxation]

.... How is it best to give this money to minimise any IHT taking into account the possibility that one or both Mr and Mrs A may die within the next 7 years. Solely from Mrs A to the sons? Jointly from Mr and Mrs A to the sons? Or doesn't it matter?

I don’t think the questions you pose can be best answered because so much more information about the financial circumstances of the parents needs to be given as well, possibly, of the sons – expected sale price of house, other assets making up combined estates of £1,200k, value of pension/retirement income, health of parents, life insurance policies and similar insurance, anticipated cost of new less-expensive home, must sons be treated equally, are their financial circumstances equal/similar etc etc – which should be talked through with a qualified, fee-paid financial adviser who would then be in a position to give advice on the total pie and each slice thereof including the one relating to gifts and IHT mitigation.

My preliminary comments (for that is all they can be) are to proceed as above and then to make the downsize before giving anything away so as to to be certain how much capital is realised from downsizing.

The broadbrush answer to the IHT mitigation question is that at the level of gifts contemplated it would not make a huge amount of difference assuming the first to die leaves everything to spouse and it is only on the death of second spouse that legacies to other beneficiaries will be made. On one extreme, if say father makes whole £250k gift (a PET) to two sons and dies within 7 years then £244k (£250 less two times one annual exemption of £3k) would be a failed PET and would use up a proportion of his NRB at time of death (currently £325K). So only about 25% of a NRB ([325 assuming no change in NRB-244]/325 %) would be available to be transferred to widow’s estate on her death. So her 1.25 NRBs would be valued at say £406 (1.25* £325k assuming no change in NRB) to set against death estate of £950k (£1,200 less £250k). As you indicate, statistically the wife may be expected to live longer so it may be better for her to make say 75% of gifts which after 7 years would be successful PET. Of course, it could turn out wife dies first and husband lives more than 7 years. Also outright gifts might not be best way to achieve IHT mitigation – could be better for example to guarantee part of a son’s mortgage and make mortgage payment gifts out of annual excess income. Or a combination of approaches to IHT mitigation may be best. Who knows until the total pie is looked at rather than just that slice concerned with IHT mitigation as per para 1 above.

... I realise that any IHT due would actually be taken from the estate ....... this would disadvantage other significant heirs of which there are several.

Concerning, the liability to IHT on failed PET’s, where liability does arise it is primarily that of donee rather than death estate of donor (which is secondarily liable) but in this case there would be no liability even if one parent made total gifts of £250k. How much, if anything, is bequeathed to other than spouse on first death obviously is one factor to consider on a matrix of who dies first/failed PETs/ non-spousal legacies.

[pdonnar]

Hmm, thanks for that. Obviously it's a much more complicated situation than I thought. You are right, it's probably best to talk to a fee-paid financial adviser.