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Where Taxpayers and Advisers Meet

Property Rich--Cash Poor

Art
Posts:2
Joined:Wed Aug 06, 2008 3:17 pm

Postby Art » Sun Feb 06, 2005 10:13 pm

My 70-year-old (reasonably healthy) mother lives in a house she is very attached to that is worth approx 500,000. However, her savings/income are inadequate for her needs. She would like to find a tax-wise way to access some of the capital tied up in her house. After reading similar situations on this website, I believe one option might be for my siblings (3) and I to buy a portion of her property, such that her share would fall below 263,000 and then for her to take that cash and create a Discounted Gift Trust. We would allow her to live in the house for free. If she can receive 5% of the principle in the DGT p.a. it would be adequate for her needs, and I understand that after 7 yrs this money would fall outside her estate.

The key objectives in this plan are to take care of my mother's immediate income needs and avoid having to sell the house when she dies to pay IHT. At her death, she wishes her estate to be held in trust to benefit whomever needs help the most from among her children (as determined by trustees). I would very much appreciate hearing opinions on whether this plan can work, or whether there is a simpler way to accomplish our goals. Of the four of us, one would not contribute toward the purchase at all, and the shares of the remaining 3 would be significantly different, leaving a bit of a complicated picture when my mother dies. Thanks in advance for any suggestions. Art

Arnold Aaro
Posts:43
Joined:Wed Aug 06, 2008 3:11 pm

Postby Arnold Aaro » Mon Feb 07, 2005 3:29 am

I believe the above would work - PROVIDING your mother DOES pay you a market rate of rent on the portion of the home she is renting from you.

If she fails to do this, the IR would simply say that as she is still having benefit from the home that was originally hers they would impose a tax on it (Pre-owned Assets Tax which has been talked about recently on this forum).

One way out would be for her to use the income from the Discounted Gift Trust (DGT) to pay you the rent on the portion of the home that is yours. This would not be a problem provided that it was documented properly for the IR to be satisfied.

This is one method to remove ones home from their estate, with an immediate reduction in the value of their estate on day 1.

[For a 70 yr old HEALTHY female, 50% of the amount put into a DGT is outside the estate immediately for IHT purposes.]

However, in your particular case, this would mean that a lot of the income from the DGT would be going on rent, rather than your mother being able to use to live on.

Hope that makes the situation clearer. Don't hesitate to call or e mail for more clarification.

Best regards,

Arnold Aaron
Investment and Inheritance Tax Planner
Zurich Advice Network
e mail: arnold.aaron@zurichadvice.co.uk
Tel: (office) 0208 437 2500 (m) 07957 440 724

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

bob.fraser@towrylaw.
Posts:765
Joined:Wed Aug 06, 2008 3:14 pm

Postby bob.fraser@towrylaw. » Mon Feb 07, 2005 5:10 am

I'm sorry, Art, but I believe that your suggestion would have an unintended consequence. Whilst I DO think that it would be effective for IHT purposes, there will be a new tax to concern you from April 2005. This is the Pre-Owned Assets Tax. Whilst the sale of a property for a commercial value will allow the transaction to be "excluded", the current legislation states that the disposal must be of the WHOLE of the interest. In your plan, your mother would only be selling part of the house. I therefore think that she will be caught by the new POAT. She would be liable to pay income tax on the market rent of the house. Please note that the Inland Revenue are looking into this issue, but at the moment the situation is as I describe it.
A better solution would be for the siblings to make your mother a loan, repayable on death. The rest of the idea of a discounted gift trust would be quite normal practice, and I specialise in this area if you need more detailed guidance.
Make sure your advice comes from an independent source.

Bob Fraser, MBE, MBA, MA
Associate Investment Director, Rensburg plc
Fellow, Personal Finance Society
tel: 02890321002
mobile 07709430958

Art
Posts:2
Joined:Wed Aug 06, 2008 3:17 pm

Postby Art » Mon Feb 07, 2005 8:52 pm

Thank you very much Aaron and Bob for your views on this matter. It sounds as though POAT poses some problems for us if we only buy 1/2 of her property. What if we were to buy the entire property, paying fair market price, then rent it to her? Could all the proceeds from the sale then be put in a DGT (and be discounted by 50% on day one for IHT purposes), providing my mother with an income of approximately 25,000, from which she would pay rent? I'll stop fishing for free advice now. I really appreciate getting some initial guidance to inform ongoing family discussions. This is a great website--very empowering for confused citizens like me and a great way to make contact with knowledgable professionals like you. Art

bob.fraser@towrylaw.
Posts:765
Joined:Wed Aug 06, 2008 3:14 pm

Postby bob.fraser@towrylaw. » Tue Feb 08, 2005 12:31 am

Yes, I believe that would be effective. However, whether this course of action is appropriate (as opposed to effective) hinges on an examination of the specific financial circumstances.
If you want specific advice, feel free to contact me for a chat.

Bob Fraser, MBE, MBA, MA
Associate Investment Director, Rensburg plc
Fellow, Personal Finance Society
tel: 02890321002
mobile 07709430958

Arnold Aaro
Posts:43
Joined:Wed Aug 06, 2008 3:11 pm

Postby Arnold Aaro » Wed Feb 09, 2005 5:41 am

The transaction you propose does work, although it is not be appropriate for everyone. A full examination of the figures and costs involved should determine whether this is so. Infact I am in the process of doing this very transaction with some of my clients at the moment.

However, for it to be watertight, one has to be careful when proceeding down this path. Everything must be documented correctly, and adequate records kept between you and your mother during the lifetime of the Trust.

As I specialise in this matter, my standard practice is to carry out regular post maintenance on these transactions to make sure documentation adds up.

Arnold Aaron
Investment and Inheritance Tax Planner
Zurich Advice Network
e mail: arnold.aaron@zurichadvice.co.uk
Tel: (office) 0208 437 2500 (m) 07957 440 724

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


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