Inheritance Tax (mitigation of)

[eeeebygum]

Several years ago my in laws were concerned about their heirs (my DH and DSiL) having to pay inheritence tax so they:

1. Had their house ownership changed to tenants in common.
2. Changed their will so that if one died first, their share of the house would be split 3 ways - one to the surviving partner, the others to my DH and DSiL, on the understanding that the surviving partner should be allowed to continue to live in the house for as long as they wanted.

The idea was that when the surviving partner died, there would be less to inherit. This was before the IHT threshold increased - they no longer need to worry about it now.

However, we potentially do need to think about our own children's inheritence, because we live in London and our house is worth more than the IHT threshold. We're only 50, so still young enough to not think about it too much, but perhaps we should. If so, is the method outlined above the best way to go about it?

(I know there are other ways of dealing with more liquid assets, to give them away gradually, but in this question I'm specifically thinking about the house).

The scenario you've detailed is no longer a problem under current IHT rules due to the transfer of unused IHT allowance to the surviving spouse.

That isn't to say that you wouldn't benefit from other IHT planing, or that rules won't change.

But the threshold is £500k each, so if the unused portion is passed on that means ghe surviving partner has a threshold of £1m. Our house (a 4 bed-semi in sw London) is worth more than £1.2m and increasing over time, so there would be IHT to pay if we did nothing, wouldn't there?

(Hopefully we will live long enough to see our 2 kids settled, downsize, contribute to their housing deposits, and live another 7 years after gifting that, but there are no guarantees).

You can give 3k away annually, each. And 6k the first tax year you do it.

You can give more for certain events, like marriages.

You can give more out of unused income, but need to get calculations right.

You can give assets using the 7 year rule but watch out for capital gains tax and you have to give it away!

Everything else needs more complicated advice but if you are thinking of your position it would be worth it, especially in light of maybe inheriting even more at some point (which maybe you won't need?) So there potentially some planning to look at even if it's just to understand where you are at the moment.

Find a STEP professional who will be able to advise what you can do to mitigate IHT given your precise circumstance.

www.step.org/about-step/public

Definitely seek professional STEP advice as PP says, but don't use the person who told your in laws to change their wills the way they did as it probably created a gift with reservation of interest and wouldn't have worked unless the surviving partner paid full market rent on the proportion of the house left to the children.
It really isn't worth leaving it to chance or trying to work it out yourself.

Don’t you think half a million each tax free is a good enough inheritance for your kids? Most people would be pretty happy with that. The last thing I’m concerned about is my estate paying a bit of tax, the kids will have a handsome (unearned by them and us) windfall even if there is some tax to pay.

Okay, if your house is already up at the level the yes it is worth thinking about to mitigate any increase in value after the first death.
Agree with the other posts about professional advice.
And also regular reviews and updating, because tax laws change over time.

You are worried about your children paying £40k tax each out of a pot of £600k? Come on.

If you want to dodge it the best thing you can do is downsize and give them a chunk of money and hope you don’t die within 7 years of doing so.

It all seems so simple, but I've seen it go wrong too many times.

If your DC own a share of your house and get into financial difficulties or divorce, for example, part of your home would be considered their asset (because it is).

Your DC stand to inheritance £1m+, pay the tax .

Pensions are not part of your estate so not subject to IHT. Don’t spend your pensions and consider Equity Release to fund retirement and reduce value of property.

www.warnergoodman.co.uk/site/blog/news/how-does-equity-release-affect-inheritance-tax

Just pay the tax - your kids will still be loaded .

Perhaps just pay the tax, equity release is maybe not the best idea as you are trying to reduce the tax burden of only 200k. Yes the property will increase but unlikely to see gains like we have seen historically.

You may also need care in later life.

If you really want to avoid it the best thing to do is sell up & dispose of it asap.

If you’re only 50, there’s a fair chance the thresholds may have changed by the time it’s relevant to you.

I don’t really get the angst expended on avoiding IHT (my SIL is fretting about her parents estate at the moment). I feel it’s all ‘bonus’ money, who cares if it’s 400k instead of £450k or whatever.

The more I read about this subject, the more it seems that the best approach is to sell up at around 65 years old and then give your children a good amount each from the sale and downsize to somewhere more modest. That way, as most people live to 75 plus, this deals with the seven year rule, and then they will later get the money from your smaller place tax free as this will be below the threshold. In reality most people don't want to downsize (40% of people never move home after 50!), but this seems the most tax efficient way of passing the money on to your children. With house prices the way they are I don't see how our children would ever be able to afford a place in London without help from mum and dad. The IHT threshold hasn't increased since 2009 so more and more people are going to have to work out what to do.

We are 50s and just heading down the route of tenants in common and will writing. Not for inheritance tax but it's the one way we can be sure that our kids will get an inheritance. Protects against surviving spouse giving it all to a new partner, or it all disappearing in care home fees

@spaceman1

The more I read about this subject, the more it seems that the best approach is to sell up at around 65 years old and then give your children a good amount each from the sale and downsize to somewhere more modest. That way, as most people live to 75 plus, this deals with the seven year rule, and then they will later get the money from your smaller place tax free as this will be below the threshold. In reality most people don't want to downsize (40% of people never move home after 50!), but this seems the most tax efficient way of passing the money on to your children. With house prices the way they are I don't see how our children would ever be able to afford a place in London without help from mum and dad. The IHT threshold hasn't increased since 2009 so more and more people are going to have to work out what to do.

Yes, this is what we will probably do. Our 4-bed house is high maintenance and we both want to downsize when the DCs fly the nest. But in the meantime I'm curious as to what the alternatives are.

With house prices the way they are I don't see how our children would ever be able to afford a place in London without help from mum and dad. The IHT threshold hasn't increased since 2009 so more and more people are going to have to work out what to do.

Personally I think this will lead to some kind of reform of IHT. The gov are banking on the valuable revenue as more & more houses are pulled into it so aren't going to want to lose it. On the other hand it's pretty ridiculous if people can't buy without inheritance regardless of their job & it just widens inequality.

Believe me, looking at ways to avoid care home fees isn’t the great financial deal people think it is.
You do really get what you pay for in care homes. Self funding can get you a whole lot more that LA funding. I wouldn’t want to be stuck in some grotty care home so that my children can inherit my lifetime savings / home.

Good point & looking at care & the NHS in its current state what on earth will it be like in 20-30 years!

You are worrying a bit too early. Even if one of you dies early the other one will inherit everything. The regulations change all the time and reality is you will likely end up payi g for a very expensive care when you are old. In about 10-15 years I would approach a specialised lawyer.
And to everyone who is saying just pay tax-that is the bloody problem.. They have already paid tax on everything they own.. Why the same assets should be taxed yet again?

@Soontobe60

Believe me, looking at ways to avoid care home fees isn’t the great financial deal people think it is. You do really get what you pay for in care homes. Self funding can get you a whole lot more that LA funding. I wouldn’t want to be stuck in some grotty care home so that my children can inherit my lifetime savings / home.

Yes absolutely. My parents and increasingly friends, are very concerned about "losing" their money to care, but having seen what happens to people who have no choices, I'd say the more you can keep hold of to pay for care, the better.

@Iwonder08

You are worrying a bit too early. Even if one of you dies early the other one will inherit everything. The regulations change all the time and reality is you will likely end up payi g for a very expensive care when you are old. In about 10-15 years I would approach a specialised lawyer. And to everyone who is saying just pay tax-that is the bloody problem.. They have already paid tax on everything they own.. Why the same assets should be taxed yet again?

Not they haven't already paid tax on what they own. They've paid nothing at all on the property gains, which are the bulk of the estate.

We inherited a similar amount from my parents. They hadn't done any tax planning & their estate paid £45K in tax. I don't really have a problem with that - the vast majority was unearned income (house). We still were fortunate to inherit a life changing amount of money.

Put it into a trust.

Have your PIL considered that if one of them dies first and you and your dh get divorced then you are entitled to a chunk of their house? What a mess.