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).

You should really take legal advice. Given that anything a spouse leaves to their surging spouse is exempt from tax and that any unused nil rate band can be transferred from a predeceased spouse to the survivor, I don’t see why this is necessary.

Sorry surviving spouse not surging.

@Fleur405

You should really take legal advice. Given that anything a spouse leaves to their surging spouse is exempt from tax and that any unused nil rate band can be transferred from a predeceased spouse to the survivor, I don’t see why this is necessary.

It's only an issue if the house is worth more than £1m, which very many relatively modest houses are in the SE of England.

They haven’t paid tax on it all already though? My MIL has an estate of over 1m (surviving partner), about 80% of that is made up of property price increases.

@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.

That's ok until divorce hits and the spouse (usually the wife) walks off with most of it. Thee are other ways to structure it now to give away but prevent the spouse getting in a divorce....I know from experiences !

@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.

Mmmm. I was a district nurse for many years, in and out of care homes. IME the 'grotty' ones did indeed provide the best care, and the more popular shiny new ones with all the bells and whistles left a lot to be desired.

@MarieG10 That is a good point, are you thinking of a discretionary trust as a workaround?

I'd also disagree that you get what you pay for with care homes. Many scruffy reasonably priced ones are excellent and vice versa. However it's a lottery and in some areas the more expensive homes do happen to be the best available (the good cheap homes are often hugely oversubscribed obviously). Self-funding gives you choice.

[quote spaceman1]@MarieG10 That is a good point, are you thinking of a discretionary trust as a workaround?[/quote]
Yes if avoiding IHT is a key aim but preventing a spouse getting it, a trust is ideal. For lesser amounts of money, it can be handed over with a legal document of a loan which is then provided for in a will. Interestingly I read of a rather embittered wife whose husband died and then she found out the money that he used to buy his house (she inherited) was a loan from his dad structured in the way I described. She wasn't very happy but it held up. I did feel somewhat sorry for her except that she gave the interview having married her second husband.....so maybe the dad had a hunch?

When we come to a point of giving children large amounts of money, we will definitely protect it, certainly until the ridiculous divorce laws in this country change that make doing nothing and living off a spouse an extremely well remunerated occupation when divorcing

@MarieG10 If the parent loans the money for the house, surely when the parents passes away the money would be repayable to the estate (repayment of loan), and then subject to IHT and possibly forcing the sale of the house at that time? A trust is an entity in its own right but can be expensive to administrate and divisive.

[quote spaceman1]@MarieG10 If the parent loans the money for the house, surely when the parents passes away the money would be repayable to the estate (repayment of loan), and then subject to IHT and possibly forcing the sale of the house at that time? A trust is an entity in its own right but can be expensive to administrate and divisive. [/quote]
Yes that's correct. It is only suitable for estates under £1m assuming the estate has a house and husband and wife scenario etc. Also the offspring receding the money has to trust they will be gifted it in the will and said parent doesn't go into care etc so is risky, but enables protection in a divorce scenario.

@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?

They haven’t paid tax on the increase in value of their house though. If they bought their house for £150k year ago they paid tax on the £150k most prob as part of there wages, but say the house has increased in value to £550k they have £400k they never paid tax on.

Exactly that @Morph22010. Our house is “worth” four times what we paid for it. We haven’t earned a penny of that increase or paid tax on it. I’m more than happy for our estate to pay some tax if that’s how it works out. There’s more than enough for our kids in a £ million estate.

@MarieG10 that's a clever approach, thanks.