Inheritance tax question.

[GingerFreaker]

I am divorced, mortgage free with one teen with autism. .

I have a brother with learning difficulties, but independent. He lives in my late parents home, which was left to me, with the proviso he has a home for life. My brother has history of stupid financial errors, the hope was to keep a roof over his head.

However, this all means I have a lot of property in my name, and not much cash. So, in the event of my death, the tax bill is likely to be huge. I can't see a way of my (now teen) son paying this without having to sell up.

If I save, it just adds to the assets. And house values just go up all the time anyway...

How do I plan for my son to get round this? I want my son to have security near his extended family, not to be packed away.

Your parents ex home would not be valued at full market value on probate if you died before your brother as it has a lifelong interest in it.

When OP said there was nothing in the will, I took that to mean her brother has no legal 'lifetime interest' in the house, it is just an understanding within the family.

If that's the case, she needs tax/financial advice re how best to manage the situation now, as well as in the event that she dies before her brother and still wants him to live in the house which she plans to leave to her DS. Leaving it up to family goodwill is not necessarily the best solution.

If her DB dies first, her DS would inherit 2 houses, so could sell one to pay any IHT and live in the other.

Yes. It is an understanding that my brother can live there for life. But if I die and my son gets a massive tax bill, he will have to sell up his own home...

The ideal solution is for me to out live my brother. Sadly, this cannot be guaranteed😁

The will was literally 2 lines, leaving everything in my name. It's always been a given I will care for my brother, something I am happy and willing to do.

Previous poster referred to STEP. I'm trying to find someone near me. Not the easiest thing to do on that site😁

Whereabouts are you in the country, OP?

When did your dad pass away?

How much is the property worth?

It might be an idea to formalise the arrangement - possibly putting the property into a trust, giving your brother a lifetime interest and your son the property when your brother passes away (as an idea, it might not necessarily be the right thing for you).

This is a complicated one OP and you have my sympathy, as it’s a headache for you to sort out. I recently had to grapple with a trust in different circumstances (one that already existed and needs to be wound up).

IANAL and my understanding is very far from perfect but I’d strongly echo the advice to find a STEP-registered solicitor (as I see you are doing). We found one and the relief of having someone who gets it is huge.

A word of warning. We learned the hard way that some trusts are structured in such a way that a 10-year anniversary charge is payable, depending on its value in relation to the IHT threshold. So there could be an ongoing cost. This is why you do need an experienced trust practitioner to advise.

Sorry, I don’t want to alarm you, but we had a big shock over this so it’s best to be aware of the possible pitfalls. Best of luck.

Yes, @pilcrow, it's the ongoing potential costs that concern me with trusts.

I've spent the afternoon looking for a STEP registered solicitor. It's been enlightening, that some company websites say yes, but the directors say no. So I'm back to the Web site, and trying to find one on there close to me. I've left a few messages, hoping someone will call me back🤷‍♀️

Have to say, you guys have been very helpful👍

I wish you well Ginger

I know a STEP registered Chartered Tax Adviser. He's in North London if that's any good. I'm wondering if the implied trust could have some legal foundation.

If your Dad died within 2 years you can look at a deed of variation and that could rejig things to protect your son.

@weirdlynormal I'm beyond the 2 years but thank you for the suggestion.

I'm currently following the suggestion from @NewLynHill and will be speaking to a STEP solicitor later today. Maybe the house can be taken out of my estate. I feel that's the correct first step. Then onto a chartered tax accountant, I think?

This has been a big worry for me, and I feel like I'm at last moving in the right direction.

👍

The parents house could be in a life interest trust so not part of your estate. It depends on what the facts support. That can still be achieved now, fairly pragmatically and cheaply.

Your home can be part gifted and you can stay living in it. See FA1986 around section 102. You need a STEP or CTA to advise and possibly some short term life insurance (7 years). What are the values of both properties?

I'm getting into this now😁

If I am correct... My parents house could be in a type of trust, and taken out of my estate, and so long as it is valued under 325k there could be no ongoing costs.

That would be ideal.

I'm getting the house valued next week, it will be a close call in terms of figures. But, I'm moving in the right direction😁

Getting there, but it will need someone STEP or CTA to sift through the facts and come to a good conclusion for you. Trusts pay IHT every 10 years at 6% on value above £325k.
There are special rules for trusts created for vulnerable beneficiaries. You could also access information on the LITRG website which is part of the CIOT. If you contact them they will put you into contact with a member who can help. They have done a lot of work in this arena with HMRC to steer tax legislation in the right direction.

So you have a copy of your fathers Will, or speak to how did the Probate on his estate, they will be able to say if you or a trust own it. Then take it for there, once you know the situation. 😊

@MyOctopusFeature thankyou. Exactly the kind of info I've been searching for but unable to find.

@MyOctopusFeature I have a question, if you don't mind.

Assuming the house is in a trust, assuming we paid the 6% at the 10 year point.

Now, assuming my brother lived for another 7 years.... What fees then? Because we would not have got to the end of a 10 year period. Is it worked as a percentage, or the full 6% but due on his death/ house sale.

And are there exit fees attached to a trust?

I hope this makes sense😁

Thanks.

The 6% tax charge is every 10 years. If house prices grow by 4% year on year - which is unlikely now - the example below may help.

Property worth £300,000 on death Y0
Property worth £444,000 = Y10
Property worth £657,000 = Y20

The tax at Y10 is £444,000 minus £325,000() = £119,000 at 6% = £7,200
The tax at Y20 is £657,000 minus £325,000() = £332,000 at 6% =
£19,920

The trust exemption band (*£325K) is based on the current figure which has not changed for years. The HMRC may change it in future and that would alleviate more tax. I am not a tax expert though I have been told that with a house the tax can be spread over 10 years so Y11 to Y20 you would pay £720 a year and Y21 to Y29 you would pay £1,992 a year. Until Y11 there would be nothing to pay. The trustees pay the tax but you could charge a rent to cover the charge.

This is a complicated concept and it is easy to be led up the garden path so you do need to make an appointment with a recommended CTA, ATT or STEP practitioner because I may have over simplified it. HMRC staff are also reasonable these days and they have an office in Truro and another in Nottingham that deal with your kind of issue. You cannot visit though and have to write or phone. they cannot give advice but they can point you in the right direction and give you a reference number for correspondence so you do not get labelled later as a tax dodger.

@myoctopusfeature.

Thank you so much.

I have an appt Wednesday. I now feel I have a better grounding, which I needed.

I am pleased for you.

You take your responsibility well. Never forget those broad shoulders of yours and enjoy this journey. Deep down you know what to do.