Tax rule changes make in­her­i­tance plan­ning a lot sim­pler

Yorkshire Post - Property - - PROPERTY - Robert Peel

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.

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.