Financial planning in IHT

by **momo101** on Fri Sep 30, 2011 2:17 pm

Hi all,
Before looking for a recommended local financial advisor, I thought it might be helpful to see if members can provide some advice on my parent’s situation and what were the options to minimise Inheritance tax / capital gains tax consequences.

OK, my father in just in his 70's, mother in her early 60's. My brother and I are the only heirs. The house they own outright are in their joint names and there is no intention to move out. I now live there along with my family but I have lived there myself for over 15 years. My family and I intend to move out next year.
The intention is that if one of them passes away all the assets (roughly £900,000) will be intended for the other spouse with the intention to remain in the house by themselves (if they can).
After both pass away, the assets (mainly the house) will be split between brother and I.

Someone, suggested to change the deeds to the house in terms of new equity shares between my parents and my brother and I, something like 35/35 parents, and 15/15 myself and brother to reduce the taxable IHT amount of assets (after 7 years), but I'm not sure if that helps at all.

Any advice most welcomed.

Kind regards

M.

by **pqtaxation** on Fri Sep 30, 2011 4:33 pm

Any advice, for it to have real value, has to be tailored to the specific circumstances of your parents. The only piece of specific information you give looks to be that their combined death estates total about £900k, comprised mainly of one house. Their other assets and future income from pensions are information that is required at a minimum.

The parents have two nil rate bands of £325k (currently) each or £650k combined. So IHT liability on death currently is 40% of (900-650)= 40% of 250 = £100k leaving £800k to pass to beneficiaries.
If your parents want to seek to mitigate that IHT bite (some 11% of death estates so not too onerous) then the estates can be reduced by making gifts to you and your brother and/or buying assets that qualify for relief from IHT; another approach might be to put in place term life insurance to cover the IHT bite.

With the sort of family circumstances and values you describe, there can generally be advantages to the estate of the first parent to die (including say 50% of house) being held on an interest in possession trust with income paid out for benefit of surviving spouse and you and your brother as capital beneficiaries (remaindermen).

My general suggestion is for parents of that age and adult children to agree objectives/wishes for parents estates, thereafter parents to see a STEP qualified solicitor to talk through their objectives/wishes to be reflected in their wills and (only) thereafter to see an IFA (preferably fee based and STEP qualified) to talk through investment/insurance alternatives in line with objectives/wishes.

There is no point whatsoever in speculating at this stage whether a 35/35/15/15 split (or any other split) of house is a good idea or not – though you should realise that if only your parents are going to continue to live in house then the gift of 15/15 to you/your brother would not remove that 30% of house value from their estates assessable to IHT owing to the gift with reservation of benefit rules which a competent adviser can cover with your parents.

by **momo101** on Mon Oct 03, 2011 10:22 am

Hi,
Thanks for the general advice,

pqtaxation wrote: Their other assets and future income from pensions are information that is required at a minimum.

Their only other assets are very small savings (a few thousands) and their current/future state pensions.

pqtaxation wrote:If your parents want to seek to mitigate that IHT bite (some 11% of death estates so not too onerous) then the estates can be reduced by making gifts to you and your brother and/or buying assets that qualify for relief from IHT; another approach might be to put in place term life insurance to cover the IHT bite.

As virtually all their estate is tied up in the house I guess this is not a viable option.

pqtaxation wrote: With the sort of family circumstances and values you describe, there can generally be advantages to the estate of the first parent to die (including say 50% of house) being held on an interest in possession trust with income paid out for benefit of surviving spouse and you and your brother as capital beneficiaries (remaindermen).

What kind / how can income be paid to the surviving partner if it is all tied up in the house?

Thanks

Momo

by **pqtaxation** on Mon Oct 03, 2011 11:33 am

As your parents’ only asset of any significant value is their house, whose market value therefore must be over £800k and close to £900k, they are aged early 70’s and early 60’s and they only have a state pension as income, then why would they not choose to downsize to release capital for them to spend in their retirements or else enter into a home equity release scheme? If they did either, their death estates would be reduced to below £650k nil rate band and they would have a better time in retirement.

by **momo101** on Thu Oct 06, 2011 12:14 pm

Hi,
They are not inclined to spending any significant money, the idea of staying put would be the posibility of using the extra space for some modest on going income to pay the bills and house maintenance through a lodger. Also, they are not keen on moving away from the area where their support network will / does exist, and surrounding smaller properties would be around the 600,000 after adaption anyway. If they did sell up then the difference would be kept in the bank, given to charity and divided up between myself and my brother.

by **tax_schmax** on Thu Oct 06, 2011 12:19 pm

A financial adviser would be of most use if there are financial assets to consider. The property could be used by releasing some equity and investing this into trust instead. Certain trusts allow your parents access to capital or income for repairs and lifestyle needs, whilst taking the funds outside of the estate for IHT. Any equity released from the property would attract interest though. It may not be as efficient as downsizing, but if they are resolute in wanting to stay in their house, they do have options.

by **pqtaxation** on Thu Oct 06, 2011 2:13 pm

momo101 wrote: If they did sell up then the difference would be ... given to charity ......

The Government's National Debt is a charity: -- so if parents chose to do nothing so that IHT is payable on their deaths, it is just that the choice of charity is made for them by HMG!!

by **momo101** on Fri Oct 07, 2011 11:41 am

pqtaxation wrote:
momo101 wrote: The Government's National Debt is a charity: -- so if parents chose to do nothing so that IHT is payable on their deaths, it is just that the choice of charity is made for them by HMG!!

Considering the circumstances, would it be not too bad to downsize after the one of them has passed away, to reduce the estate to under £650K?

by **tax_schmax** on Fri Oct 07, 2011 12:20 pm

Downsizing would not reduce the size of the estate, it would change its composition. As far as I can tell, your parents are not ready for advice and may be reluctant to act in any event. I'd wait as per your last post. The rules can change at any time, don't plan for something and expect it to be OK in a few years. In the last 5 and a bit years, the way trusts are taxed has changed, Interest in possession trusts have all but disappeared and we've become able to "inherit" our spouses unused nil rate band, to name but a few important changes. Having said that, buses are indiscriminate. There are no expiry dates on any birth certificates.