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Where Taxpayers and Advisers Meet

Avoiding the Property Trap

Joined:Wed Aug 06, 2008 3:23 pm

Postby icowden » Tue Apr 12, 2005 6:45 am

Hi all,

I am seeking some advice on inheritance tax. My mother lives in a large house, along with my sister and her partner and son who live in an extension to the house that they raised a mortgage and paid for. My mother's name is on the deeds to the house however, and is a widow.

Our concern is that the house value overall is about £600,000 and in the event of my mother's death we would not be able to pay the inheritance tax - which for my sister would mean losing the house and her small business (she runs a livery stable which is part of the house).

Are there any steps we can take as a family to lessen the burden of inheritance tax? My mother intends that the house will be left 1/3 to myself and 2/3 to my sister on the basis that she paid for about a 1/3 of it! There is no other significant estate (i.e. no savings or suchlike).

Has anyone any advice?


Arnold Aaro
Joined:Wed Aug 06, 2008 3:11 pm

Postby Arnold Aaro » Tue Apr 12, 2005 7:28 am

One option to consider would be to purchase mum's home. Mum could then invest the proceeds of sale in a Discounted Gift Trust to rid herself of the capital. The income she would receive from the trust could then be used to pay rent to the new landlord - i.e. you / your sister.

A Discounted Gift Trust would allow your mother to gift proceeds of sale away to through a Trust (normally in an Investment Bond). Mother would not be allowed to touch the gift until the inevitable happened to to her but she would be allowed to take a tax free income FOR LIFE, from the gift she has made.

The result is that on starting the trust and making the gift, a considerable portion (e.g. 50% for a healthy 70yr) of the amount put into it would be immediately classed as outside the estate for Inheritance Tax purposes.

After 7 years the whole amount falls outside the estate, and you have then avoided Inheritance Tax on complete gift. But of course your mother is still receiving the income for life which they can use towards living expenses, or perhaps to pay rent to you.

There would certain factors (e.g. health, affordability of you/your sisters etc.) and also whether you as a family like this route which need to be taken into account to confirm this is appropriate in this situation, but in the right circumstances could be suitable action.

Don't hesitate to contact me for clarification on anything.

Arnold Aaron
Investment and Inheritance Tax Planner
Zurich Advice Network
e mail:
Tel: (office) 0208 437 2500 (m) 07957 440 724

[I advise on Inheritance Tax Planning, and specialise in Discounted Gift Trusts and Investments in general]

Joined:Wed Aug 06, 2008 3:10 pm

Postby robertmlaws » Tue Apr 12, 2005 7:44 am

The inheritence tax on the house can be paid off in equal annual installments over ten years.

When your sister helped pay for the extension why did she not get her name on the deeds? You don't want your sister's contribution to be treated as a gift to your mother and then be taxed when she inherits it back again! Maybe this can be put right to that your sister can use PRR on her part of the house and thuis reduce the part of the house that falls into your mother's estate.

not a lawyer

Anthony Nixon
Joined:Wed Aug 06, 2008 2:18 pm

Postby Anthony Nixon » Wed Apr 13, 2005 1:58 am

Robert may well be right that your sister already has an interest in the property because of paying for the extension though this is a tricky area of law and needs reviewing carefully.

Whether or not this applies there is a very helpful provision in the IHT legislation. Because your sister actually shares the property with her,your mother can give a share of the property to your sister by a lifetime gift without this being a gift with reservation and with the pre-owned assets tax coming into play.

There are some conditions to be followed but, if your mother survives 7 years after a gift of two thirds of the house to your sister this could allow the house to be free of IHT.

Obviously you also need to put in place some arrangements for the risk of your mother not living the seven years. If that happened the gift to your sister would increase the IHT payable on the remaining one-third of value that comes to you.

You and your sister may have to agree a way of her buying you out if she wants to live in the house after mother's death.

But these are all issues that can be coped with if there is goodwill between you all with the help of good professional advice.

If you want to talk this through further on a no obligation basis do give me a call.

Anthony Nixon
Lester Aldridge Solicitors
Alleyn House
Carlton Crescent
SO15 2EU

Tel: 023 8082 0442
Mob: 07881 920742
Fax: 023 8082 0441

Joined:Wed Aug 06, 2008 3:14 pm

Postby bob.fraser@towrylaw. » Wed Apr 13, 2005 3:03 am

The final point to Anthony's reply is that your mother then needs to specify in her will that her remaining 1/3rd share of the property will pass to you. As this is (in today's terms and based on your info) £200,000, there will be no IHT payable as it is less than the nil rate band of £275,000.

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