How can I maximise my son's inheritance?

[adamh]

Hi, I am a 72 year-old widower. My wife died 12 years ago I have not remarried nor had any partners since.

I have various medical problems and my life expectancy now is quite uncertain. I could keep going for 20 years but 3 to 8 years would be most realistic.

My assets are approx:
a) £1M house
b) £1M non-ISA OEIC/unit trust investments (my CGT losses brought forward exceed the unrealised capital gains)
c) £0.5M ISA OEIC/unit trust investments
… so about £2.5M in total.

I have one adult son (39), who is single and living with me in my house. He helps care for me, in addition to a full-time female carer who I pay and who lives here too.

My pension gives me about £40k/year and I receive around £5k/year in benefits. My live-in carer and other living costs amount to approximately £45k/year at the moment. At some point I may have to move in to a nursing home as it becomes too difficult to care for me at home.

In her will, my wife used her nil-rate band to give to our son in trust and she passed the remainder of her wealth to me. My son and I have not had time to deal with tax planning so far and I have only gifted him around £20k up until now.

I would like to maximise the wealth that I pass to my son by minimising inheritance tax, etc. I trust that my son will arrange the right things for my wellbeing so I am willing to go give (almost) everything to him now or go along with whatever schemes are best.

I’d be very grateful for any advice on what strategy or set of strategies would allow me to pass my wealth to my son while minimising the expected total that will be lost to tax?

Thank you.
Adam

[tax_schmax]

In short the strategy you should follow is to approach an adviser to look into your specific circumstances. However, from what you have said, you have substantial capacity to make gifts to your son during your lifetime, and this is often the most efficient thing to do. You need to decide if trusts would be helpful either to his own affairs or perhaps from your perspective also. The nursing home issue is not a huge problem, your income is quite close to meeting these costs, when you factor in the benefits that would be available to you also. The property could be let to make up a shortfall or the local authority could bridge the gap between your income and the cost of care by securing a charge against your property, to repay the debt once the property is sold. This is only one option; you have many. Selling the property would be another. You need to feel comfortable that you have enough assets to meet all your needs, and give the rest away. You may also consider assets that qualify for business property relief to give some relief from IHT, without the need to wait 7 years for any exemption.

Without seeing an adviser, you will not be in a fully informed position. Based on the scant details provided, the above could be argued to be a worthwhile plan of attack, but could just as easily be toxic to you particular family. It would take you and your son far less time that you imagine to get a clearer view of what your options really are.

[adamh]

Many thanks for your advice, tax_schmax. I agree that it will be sensible for us to approach and adviser at some point. Still, I am quite keen to get some ideas on here first and to see if there is a typical solution to our situation so I can be better informed before paying somebody. Then if the adviser starts suggesting something way out, I can say hang on...

Basically, I have £2.5M, I’m not sure how long I will live, I would like to give everything to my son and I would like to be taken care of until I die.

What do the experts here think is a good approach to such a situation?

Based on the advice in the previous post and with the reading I have done so far, would the following steps be sensible/optimal?:

1) Gift the £1M house to my son now and start paying full market rent to him for as long as I am still living there.
2) Gift £0.8M in non-ISA investments to my son now.
3) Put £0.2M in non-ISA investments into an IHT AIM portfolio now.
4) Keep the £0.5M in ISA investments to live on. (so I maintain the ISA tax advantage while alive)

Or maybe there is there a better approach / different amounts recommended. Anyone’s thoughts welcome.

Thanks,
Adam

[adamh]

I wonder if anyone else can suggest the best IHT planning steps that I should be considering to minimise tax for my son?

The situation is a fairly simple, in summary:
- I (single parent) wish to give everything to single child.
- I may not last 7 years.
- I have £2.5 million assets (house + investments).

I'd be interested if there is some kind of consensus on what to do in this situation or if there are lots of different ideas out there.

Many thanks.

[pqtaxation]

1) Gift the £1M house to my son now and start paying full market rent to him for as long as I am still living there.
2) Gift £0.8M in non-ISA investments to my son now.
3) Put £0.2M in non-ISA investments into an IHT AIM portfolio now.
4) Keep the £0.5M in ISA investments to live on. (so I maintain the ISA tax advantage while alive)

I think you have to realise that this is a board that focuses on technical aspects of taxation rather than on estate planning (EP) though part of the latter may be, and usually is, tax efficiency.

One tax comment on what you’ve written is that, as your son lives in the house with you, you can gift him 50% of house (and probably upto 70% ) without there being a reservation of benefit as long as you pay at least your proportion of household expenses and, preferably in your circumstances, all of them.

EP should be done holistically after gathering of all the facts so as to tailor it specifically to your and your son’s circumstances. Generalities are usually of little value.

Nonetheless, one EP tax comment on what you’ve written is that your thinking IHT mitigation relies heavily on PETs (fully effective after 7 years) with little weighting given to BPR - £200k (under 10% of your estate) – and nothing to APR which are both fully effective after 2 years. In view of your description of your health profile and circumstances that may be one area for discussion.

[adamh]

Many thanks, pqtaxation. Yes, I think my Estate Planning question does mainly boil down to minimising overall tax, most especially IHT. There are non-tax aspects but I don’t think they are too significant as I trust my son and I am willing to give everything to him now and/or later, in whichever way is likely to be most tax-efficient.

Thanks for pointing out the Agricultural Property Relief option. I don’t currently own any farmland and I’m not in any fit state to start farming myself. Also, I’m not sure I’d wish to move to a farm as I need easy access to the best specialist doctors and other amenities of a large city. Is there still potential to for us use this relief to eliminate IHT within 2 years?

Can I not gift my son 100% of the house we live in? I would be prepared to pay my son full market rent and any other costs.

Thank you.

[tax_schmax]

If you plan to pay any rent at all, you will need to hold more assets to provide you with income, which will in turn attract income tax and IHT. Rent on a £1M property should be in the region of £50K. If you are able to downsize this would free up actual capital to be given away or put into BPR qualifying investments. Without knowledge of the prognosis of your ailments, it is not possible to factor in survival once you are admitted to a home with nursing care. In my experience, a good nursing home can prolong life expectancy a little due to the 24 hour care available and the reliability of ensuring medication and treatment is given when needed. If you agree that selling your home can wait until you enter a nursing home, you may be able to defer dealing with the property matters and deal with the more substantial liquid assets as a priority.