Tax rule changes make inheritance planning a lot simpler
CHANGES to Inheritance Tax legislation over the last few years have made IHT planning a lot easier these days in that all or any unused part the IHT nil rate band, currently £325,000, can now be transferred from one spouse to another if this was not fully used when the first spouse died.
This has meant that complex will structures involving the use of trusts are no longer appropriate for joint estates that fall below £650,000. Simple wills that leave everything to the surviving spouse may be all that will be needed to avoid IHT.
Previously this would have meant a tax bill of £130,000. Complex wills involving trusts may still be needed but generally these will be for non-tax reasons to protect assets or to ensure that these end up in the right hands where modern family structures are complicated with second marriages and children from both marriages.
Although these changes are welcome and will simplify matters, there are still large numbers whose main asset is the family home and the value, even in these days of reduced property values, still exceeds £650,000. These families are therefore facing a large IHT bill when they die. There are, however, planning opportunities that are still available.
The first option to consider would be to sell the property and downsize thus releasing capital that can either be used to fund gifts to children now or to provide an income in an IHT efficient manner.
If it is not possible to sell the house outright then there are commercially available equity release schemes that would provide capital to fund lifetime gifts by providing a lifetime mortgage. On the second death the house would then be sold and the proceeds used to repay the mortgage and interest and any balance left over would be available to distribute to children. The outstanding debt would reduce the amount chargeable to IHT.
If your children still live with you it is possible to gift them a share of the house and the amount gifted would fall out of your estate for IHT purposes if you survive the gift for seven years.
You would need to be careful with this type of arrangement in that the children would have to occupy the house with you and pay no more than their fair share of the running expenses. If they moved out in the future you would be faced with the prospect of having to pay them a full market rent for their share in order to avoid strict tax antiavoidance legislation and ensure that the value of the interest gifted remains outside of your estate.
You could also consider what is known as a full consideration lease scheme, which involves you gifting the property to your children, whether they lived with you or not, and then paying them a full market rent to continue occupying it. Again, you would have to pay full market rent.
You could also consider a sale and loan arrangement with your spouse. This involves one spouse selling their half share to their partner for full market value but leaving the proceeds outstanding as a loan.
The benefit of the loan is then gifted to the children removing that amount of value from your estate after seven years. Although the house is still owned by one spouse it is then subject to a mortgage in favour of the children and both parties are able to carry on living in the house rent free and avoid the antiavoidance legislation.
Finally, if none of the above arrangements are suitable then consider life insurance cover. This will not reduce the amount of IHT payable but would produce a lump sum on death to enable the IHT to be settled.
Do, however, bear in mind that where property is involved the Revenue will allow you to settle any IHT by 10 equal annual instalments but they will charge interest on the amounts outstanding and the current rate is three per cent a year and the Revenue would expect the tax to be paid in full if the property is subsequently sold.