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ways of reducing inheritence tax?

(8 Posts)
OTTMummA Wed 10-Apr-13 14:17:41

Hi, just need some advice really, basically my FIL has inherited roughly 200k from his father recently, he has talked to us about the fact that he will have to pay inheritence tax as added to his own assets it has taken him over the 325k allowence.

He has been given 2 options by his financial advisor to help reduce this.
1: give his son (us) a large deposit for a house (over 100k)
2: put money in a trust for my husband and our 2 children.

Im not sure which would be better tbh, although we would love our own home outright i think that the money would grow in trust accounts? but all the information that i have looked at says that trusts are still counted under the 325k so will be subject to IHT?

FIL has been asking us what we think about it all and me and DH just keep going round in circles.

What other options are there and what would you do?

LadyKooKoo Wed 10-Apr-13 14:42:32

He doesn't have to pay it now. It would only be an issue for you if the estate is over the threshold when he dies. How old is he?

Alwayscheerful Wed 10-Apr-13 14:49:28

If he had a wife and is not divorced he will have her unused £325 allowance too so £650. There is another option which is deed of variation ie the will is changed to leave the money o his son.

OTTMummA Wed 10-Apr-13 15:26:07

He is divorced, early 60's but has a life limiting disability, so not 100% tbh , although he is well looked after and has expert medical care <he will probably out live me>
everything will be left to my DH (only child) and the children, as it stands his assets are within the 300k range as it is, no debts.
He may well need assisted living in the future but has said he wants to 'gift' as much as he can so it's not all swallowed up by care fees ( although we would probably end up caring for him ).

I have told him to spend it travelling, enjoying himself, but he said he has got more than enough for what he wants to do.

I am concerned that if he gives us money for a house now that we will still have to pay IHT on it when he passes.

LIZS Wed 10-Apr-13 15:34:17

If he died within 7 years of making a gift it would be considered as part of his estate for IHT purposes. He won't be paying it though, the estate will before it is passed on. Not sure there is any real advantage in trusts any more , I think the rules have changed. He could however gift up to a certain amount each year tax free and more for specifics like on marriage - see here.

OTTMummA Wed 10-Apr-13 15:57:58

Ah, so i think i was right, trusts are not exempt.
It would be better to 'gift' X amount to each of the children each year into their accounts/ISA etc.

What would happen if we bought a house with money he has given DH, and then later on he came to live with us because of his health, despite him having his own house, would that be considered exempt from the 7year rule?

LemonEmmaP Wed 10-Apr-13 16:04:28

My understanding is that if you can reasonably demonstrate that he didn't give you the cash on the understanding that he would benefit from it, then it would still be exempt from IHT. If, say, he came to live with you after six months, you might be on shaky ground, but if a couple of years had passed then you should be able to reasonably argue that his gift was made in good faith and was not an attempt to dodge IHT.

Having said that, I would have thought that making a Deed of Variation on his father's will to gift the money directly to your DH would be an even better option, as it effectively bypasses FIL altogether, and means that your DH is made a beneficiary of his grandfather's will, and so the only IHT to consider would be that payable on grandfather's will.

(warning - I haven't looked into this for eight years or so when my DDad died, so please don't take my word as gospel!)

OTTMummA Wed 10-Apr-13 16:23:11

Just had a quick look at Deed of Variation, and it looks like the best option if it applies.

Thank you for your help smile

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