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Where Taxpayers and Advisers Meet

Reduce Inheritance tax by adding sons to deeds

thehiker99
Posts:116
Joined:Sun Aug 08, 2010 11:57 am
Reduce Inheritance tax by adding sons to deeds

Postby thehiker99 » Wed May 23, 2012 10:50 am

I’m trying to plan ahead to reduce potential IHT for our two sons:

Scenario.

My wife and I live in a house worth around 500K, which is in our joint names.
We have a flat in a nearby city worth about 165K, and a second one , worth about 70K.
All in our joint names.
We currently have about 300K in cash.

We’re in our late 50s, in good health, and our two sons are in their late teens/mid twenties.

First of all, if my wife and I went down in a plane crash tomorrow, what would be the IHT exposure for our children now, today?

Assuming the normal scheme of things comes to pass, where one of us passes, on, and later the other, more than 7 years hence, is there any point in adding our 2 sons to the deeds of all the properties now.?
Would this reduce their IHT liabilities, once my wife and I are both gone.? Are there any Capital gains tax implicatiosn in doing this.?

I’d also like clarification on whether one or BOTH of us have to survive 7 years, for our shares of the assets to come out of our estate.

Not sure if there’s any difference between Scotland and England, but all properties are in Scotland, and we live in Scotland.

The Hiker.

pqtaxation
Posts:353
Joined:Wed Aug 06, 2008 3:38 pm

Re: Reduce Inheritance tax by adding sons to deeds

Postby pqtaxation » Wed May 23, 2012 7:16 pm

A simple overview:

Joint death estates = £500+165+70+300k = £1035k

2 NRBs = 325*2 =650

Taxable joint death estates = 1035-650 = 385 (but will be reduced by funeral expenses etc)

Tax payable @40% = 385 @ 40%= £154k

Merely gifting children an interest in your family house if neither of them resides there (or will move out within next three years) will not reduce your (singular) taxable estate because you (singular) retain the benefit of the gift.

As you’re in your later 50’s and in good health, I’d suggest you develop an overall financial plan for next few years and thereafter for your retirement rather than worrying about IHT in isolation in the unlikelihood that both parents die at same time, presuming each parent has a will to bequeath everything to spouse (if spouse survives for 30 days and if not to children).

But to answer your question, any lifetime gift to your children is made by each parent individually. So say you (plural) decide to gift each child 25% of the £165k rental property, then each parent would gift each child 12.5%. On either parents’ death within 7 years of gift, there would be a failed PET which would reduce transferrable NRB to surviving parent or added back to death estates if died at same time (with some taper relief on IHT payable if deaths occur after 3 years but before 7).

At this level of simple overview, Scots IHT payable same as English.

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Reduce Inheritance tax by adding sons to deeds

Postby maths » Wed May 23, 2012 9:37 pm

Perhaps surprisingly, where the governing law of a will is Scottish the IHT consequences in the case of simultaneous deaths is materially different from the IHT consequences where the applicable governing law is English.

In short, the IHT position is in principle worse where Scottish law is in point.

thehiker99
Posts:116
Joined:Sun Aug 08, 2010 11:57 am

Re: Reduce Inheritance tax by adding sons to deeds

Postby thehiker99 » Thu May 24, 2012 7:00 am

Maths

Thanks for you concise reply.

Does the fact that son number 1 still lives in the main house with us, and son number two lives in the 165K flat in Aberdeen, (student, just finished first year), change any of what you said?

Assuming he does not drop out, son number 2. (the student), will be at Aberdeen for at least another 3 years.
Immpossible to say how long son number one might carry on living at home.
Our wills, bequeath everything to the other spouse.

The 65K flat is rented out commercially.

Regards

The Hiker.

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Reduce Inheritance tax by adding sons to deeds

Postby maths » Thu May 24, 2012 8:43 pm

Ignoring simultaneous deaths the aggregate estate is £1.035m and as pqtaxtion indicates the IHT charge on both deaths would be £154K.

This due to aggregate estates exceeding the equivalent of two nil rate bands by £385K.

If you gave away £385K and survive for 7 years basically IHT reduced to nil.

Thus, you could give flat to son living in flat: £165K.
Then give other son other flat £70K plus cash £95K ie £165K.

Total gifted circa £330K.

Gifting the £165K flat in which you/wife haven't lived means CGT but as you're both non-UK resident then no CGT. If and when son sells no CGT as it is his main/only residence.

Gifting say only part of £70K flat not IHT effective unless son also gets relevant % of any rents.

Could possible transfer two flats on discretionary trust for benefit of two sons if you're concerned about outright transfers to them.
No CGT on transfers (as you're non-UK resident); £235K falls within you're nil rate bands; limited IHT on trusts on on-going basis.

Gifting part of your main home to son who lives with you not really IHT effective if he's likely to move out before you and wife die (as it becomes a gift with reservation).

Re dying simultaneously, my understanding is that under Scottish law the general rule (ie older dies first) does not apply to spouses (ie both held to die at same time). This means that neither spouse can inherit under the other spouse's will; thus IHT charged on each spouse's estate (ie £154K in total as above). Under English law in the same circumstances IHT would be charged only on estate of younger spouse which would be nil; saving £154K.

Maybe others may express their views on my comments.

pqtaxation
Posts:353
Joined:Wed Aug 06, 2008 3:38 pm

Re: Reduce Inheritance tax by adding sons to deeds

Postby pqtaxation » Fri May 25, 2012 4:07 pm

Ignoring simultaneous deaths the aggregate estate is £1.035m and as pqtaxtion indicates the IHT charge on both deaths would be £154K.

1) .... Gifting the £165K flat in which you/wife haven't lived means CGT but as you're both non-UK resident then no CGT. .....No CGT on transfers (as you're non-UK resident); £235K falls within you're nil rate bands; limited IHT on trusts on on-going basis.

2) ..... Re dying simultaneously, my understanding is that under Scottish law the general rule (ie older dies first) does not apply to spouses (ie both held to die at same time). This means that neither spouse can inherit under the other spouse's will; thus IHT charged on each spouse's estate (ie £154K in total as above). Under English law in the same circumstances IHT would be charged only on estate of younger spouse which would be nil; saving £154K.

Maybe others may express their views on my comments.

Maths

Re 1) OP says nothing about being non-UK resident - he & his wife appear to be resident in Scotland.

Re2) as cumulatively 2 NRBs (one transferrable if there is a survivor) would be available to set against cumulative death estates irrespective of deemed order of deaths (whether older first, simultaneous, younger first), I can't see how IHT payable would differ dependent on how that order is deemed when all material assets in their two death estates are held jointly and pass to surviving spouse (if any, otherwise to children). Please explain in more detail your thnking.

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Reduce Inheritance tax by adding sons to deeds

Postby maths » Fri May 25, 2012 5:10 pm

PQ
Re 1) OP says nothing about being non-UK resident - he & his wife appear to be resident in Scotland.
Agreed. My comments are based on thehikers other postings which indicate he is non-resident; his wife may or may not be.
Re2) as cumulatively 2 NRBs (one transferrable if there is a survivor) would be available to set against cumulative death estates irrespective of deemed order of deaths (whether older first, simultaneous, younger first), I can't see how IHT payable would differ dependent on how that order is deemed when all material assets in their two death estates are held jointly and pass to surviving spouse (if any, otherwise to children). Please explain in more detail your thnking.
The difference in the aggregate quantum of IHT amounts referred to above is the difference between the effect of Scottish v English law where simultaneous deaths occur.

thehiker99
Posts:116
Joined:Sun Aug 08, 2010 11:57 am

Re: Reduce Inheritance tax by adding sons to deeds

Postby thehiker99 » Sat May 26, 2012 11:53 am

Maths
PQTaxation.
Thanks you both for your reply.
I need to diegest all this.

I can at the moment say the following:-

It's true that I am not, at this time, resident for tax purposes, due to being in full time overseas employment, less than 91 days a year in the UK etc.
My wife is UK resident.
However, I will be retiring in the next couple of years, and would most probably be UK resident, when all these scenrios come to pass. (I hope...)

The Hiker.

dedalus
Posts:58
Joined:Sat Aug 20, 2011 6:36 pm

Re: Reduce Inheritance tax by adding sons to deeds

Postby dedalus » Tue May 29, 2012 9:52 am

Could possible transfer two flats on discretionary trust for benefit of two sons if you're concerned about outright transfers to them.
No CGT on transfers (as you're non-UK resident); £235K falls within you're nil rate bands; limited IHT on trusts on on-going basis.

.
Hello,

Would the seven year rule still apply to a discretionary trust such as the one you describe above?

Also does a tryst trigger a tax at a certain time interval?

many thanks

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Reduce Inheritance tax by adding sons to deeds

Postby maths » Wed May 30, 2012 12:48 am

Would the seven year rule still apply to a discretionary trust such as the one you describe above?
Transfers into trust typically constitute chargeable lifetime transfers and are thus subject to IHT at that time whether the transferor survives for 7 years or not; if he does not survive 7 years an additional charge to IHT arises. Both charges may be nil if they fall within the individual's nil rate band.
Also does a tryst trigger a tax at a certain time interval?
Yes every 10 years and also when property leaves the trust.


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