Can a home be removed from IHT liability?

[andyb]

My mother who was widowed a number of years ago has a home worth somewhere in the region of 450-500k. She also has investments of about 50k. Using these figures my calculations would be that the IHT liability on her estate is somewhere in the region of 100-120k.

I realise that if she were to sell her house and release some capital, pehaps buying a cheaper property, these funds could be given away and would fall under the PET rules. Some simple life assurance (in trust!) for 7 years could be used to pay for IHT on the sum given away to protect against her dieing during that 7 year period.

I have read a number of articles in the press and on the internet including ones on this web site that say that a house cannot be gifted where the person making the gift still has an interest/gets direct benefit from the gift i.e. in this case lives in the property.

Is there any other course of action that can be taken in these circumstances to reduce/remove the IHT liability? Would using an equity release scheme to get funds as a PET outside the estate be worthwhile? Are there any trusts that can help or is this just too complex and risky?

Any help would be much appreciated.

Thanks.

My question is

[Nigel Lord]

Andy

The main obstacle to removing the residence of the subject of IHT planning is the application of the Gifts with Reservation Of Benefit (GROB) rules. These prevent a donor from making an IHT efficient gift and retaining any benefit from the asset (i.e. living in the property at a lower than commercial rent).

One of the most efficient methods of reducing the value of the asset in the donor's estate relies on one or more of the beneficiaries living in the property, In these circumstances it is permissible to gift a proportion of the property as a PET as long as the donor continues to contribute an equitable share of the properties maintenance costs. This strategy often uses a trust to protect control of the asset or to facilitate future generation IHT planning.

If your mother's circumstances do not permit the above strategy, I would suggest the following:

1. Release equity by way of a mortgage or equity release product and gift the capital as a PET. Your mother's estate would be further eroded by the mortgage payments.

2. A more sophisticated version of 1 would be to use the funds raised to purchase an income bond which could be gifted to a Discounted Gift Trust (DGT). The income could be used to pay (most) of the mortgage payments. This would immediately remove a proportion of the asset from you mother's estate, with the reminder being a PET (i.e. leaving over 7 years).

3. Purchase a new property on you mother's behalf, enabling her to release her equity which could be gifted as a PET or via a DGT. By using a trust arrangement any future CGT liability could be protected against.

4. Consider life insurance (possibly prohibitive).

All of these schemes have advantages/disadvantages/costs and risks. By tailoring the solution to your mother's personal circumstances these issues can be managed accordingly.

If you require any further assistance please do not hesitate to contact us, and we will be happy to act on your behalf.

Nigel Lord
Lord Associates
Taxation & Business Consultants
Caxton House
Old Station Road
Loughton
Essex, IG10 4PE
020 8418 9101 & 07769 931852
mail@lordassociates.co.uk

[Taxbar]

DearAndyb,

There are currently 2 methods that may be able to place your mothers house outside her estate and still let her live in it.

These are the Double trust or house debt scheme and reverse ingram. Both have been covered extensively in discussions on this forum.

See Home loan scheme and IHT datrd 27th July in the Inheritance Tax Section of this tax tips forum.

I will shortly be wrting an artilce on this are in my section of this website. (UK & International Tax Law)

Daniel Feingold
sedrate@easynet.co.uk
Tel: 0161 720 7244

[Taxbar]

Dear Andyb,

you will find a further detailed discussion in the Inheritance Section of this forum.
under Eversden Ruling June 17th 2003.

Daniel Feingold

[Nigel Lord]

andyb

As Daniel is aware and has previously advised, the validity of the home loan/debt scheme and the double trust scheme have not been proven, and there is always some small risk of retrospective legislation In my previously life as a consultant at one of the big four accountancy firms we were not generally permitted to market the schemes due to the risk exposure.

Some wealthier taxpayers may take the view that they are worth throwing some money at in case they stick. Several advisers that I know will still not take the risk even in these circumstances.

In view of the size of your mother's estate, I do not think that the cost/risk/administrative burden could possibly be justified.

Perhaps Daniel would like to comment further.

Nigel Lord
Lord Associates
Taxation & Business Consultants
Caxton House
Old Station Road
Loughton
Essex, IG10 4PE
020 8418 9101 & 07769 931852
mail@lordassociates.co.uk

[Taxbar]

Andyb'
I don't know enough about your mother's circumstances to know whether this is for her in terms of risk and cost; that is something that cannot be determined in a few lines on a website!

I think Nigel is being unduly pessimistic!

I have spent many hours researching the legal basis of each aspect of this idea and implemeting the scheme on a bespoke basis for many clients in different ways to suit specific needs.

The House Debt Scheme is a highly legal and complex vehicle and I don't agree that there's a risk of retrospective legisation, the actual idea may not make it through the Courts. I actually think its legal merits are sufficient and well-founded, that it will end like EVERSDEN.

The real risk comes from the packaged versions and those who are implementing on a non-bespoke basis. Its just not suited to that methodology. It needs the watchful eye of Tax Lawyer as do all Trusts based planning. The Standard Document approach ( fill in the blanks!) is the fastest way to ruining good tax planning!

Daniel