Avoiding Inheritance Tax - advice please

[suzywong]

Hello
Can anyone direct me to a website that gives pointers on how to avoid Inheritance Tax please.

Maybe I should have put this in Parenting:
The time has come for my sister and I to have this discussion with our parents, and while they are not slow they do pretend not to know anything about finance. We feel that if we could provide them with some information for them to consider at their leisure we may be able to save the surviving parent a lot of worry in the event of ......well, you know.
(They are both hale and hearty, it's just that these things do need addressing at some point)

Any advice greatly appreciated

Is this any good?

\link{http://www.inheritance-tax-planning-group.co.uk/\here is a good site for the basics. Anything more complicated and you'd probably be better off seeking professional advice.

That's a great start, thank you
(my word you are quick)

Sorry, cr*p at doing links:

here

You can go to the inland revenue site which has some info, but your best bet is going into a book shop and getting the lastest tax planning book (a dummies guide type thing). Bear in mind that the rules change on a regular basis, and this is a very complex area of tax and the government is trying to minimise tax avoidance.

If their estate is greater than approx £260k then they will by subject to tax, and if the estate is substantially greater than this and/or complex with more than one property and overseas assets I would suggest a tax accountant.

Remember that if one parent were to die, the other needs to have means to live. The government has just closed a loophole of the putting of houses in trust but allowing the parents to carry on living there.

The list of issues and possibilities is endless and unless you are confident of the tax rules yourself they will need some help.

Also, and please don't take it the worng way, your parents money is theirs to do what they want with, they may want to spend it on holidays etc and you and your sister have no entitlement to their estate. You never know they have left everything to a charity - like my gran

pollingford
thanks for the detailed advice and the warning that things change all the time
Of course we know that our parents have the right to spend their money as they wish, and they do take wonderful holidays and treat themselves very well, as is their right, they worked for it they deserve it. We are concerned that they are going to miss out on one of these ever changing regulations and that the surviving parent will no longer be able to live in a style to which they have become accustomed, if they continue to avoid this issue whilst considering their future finances

suzywong I'm no expert but sounds like you are worried in case one of them dies. I presume they are married, in which case IHT does not apply between husband and wife, so if one of them dies the other will automatically get the estate (if they have stipulated this in their wills) and not be liable for IHT.

As to them leaving money/things to you, if they do it now and survive 7 years you will not pay IHT - it's called a PET (potentially exempt transfer) but as pollingfold says they can't give you their house and then live in it unless they pay you rent!

Do check with the IR that I am right as I said am no expert and things change....

CD that is our concern,
so it's not Inheritance tax avoidance then, it's how best to manage their funds if one of them dies.
Did I mention I was no bright spark when it came to finance either?
Who gets their house is not an issue, as my sister has a bigger one and I'll be on the other side of the world.
We just want them to follow the most productive path they can with their money.
Thanks again

What do they have to manage Suzywong? Presume they have pension, state/private or both. Savings? Are they using their full tax free allowances in ISAs etc? Or is it all in a box under the bed or in an account where they pay tax?

Do they have annuities? Could they improve on the returns (don't know, can you cash one in and buy another, I think possibly not).

I think you just need to ensure that their financial affairs are transparent so you can ensure that they aren't paying tax when they don't have to and that they are maximising returns on savings

dh and I have been reviewing our wills. Our solicitor has given us a great piece of advice which we are following.

If one of us dies the other inherits everything. But if we both die within 30 days of one another the kids inherit.

Solicitor advised that all inheritance over 263K is subject to 40% inheritance tax.

However if we slightly changed the way in which our mortgage is shared (I can't remember the exact terminology) It makes the house half and half property if we both die within 30 days and the kids inherit.

That means they only pay inheritance tax over and above 526K. A massive difference.

According to my father who used to work for the IR in this area, The Times publish a free guide to this, but just checked and could only find one on Remortgaging so perhaps it is being updated. If I get a reference for it I'll let you know. However many of the existing loopholes are being closed by the forthcoming Finance Bill.

suzy - i had a similar thread afew months ago
search capital gains tax
hth

Janstar - you mean tenant in common. Normally if you are married then you own property as joint tenants - that means you both own all the property and it automatically goes to the other spouse.

If you are tenants in common then both parties own 50% of the property and can gift it to whoever they want. It would appear to work but if parent A died before parent B and gifted their half of the property to parent B then you would be in the same position as one parent would own 100% of the property. If parent A died and gifted half of the property to children then you would be in exactly the same position as if under inheritance tax - ie: decreasing tax liability over 7 years.

The scenario really only works if both parents die at the same time.

Thanks kaz, yes that is it. We have it so if we die within 30 days it is deemed to be both at the same time. Therefore if we are both wiped out in a car crash the kids get more money.

Suzy

It would appear that your greatest concern is making sure that a surviving parent is still abe to live comfortablly. This is related to income, not inheritance. My parents are trying to sort this out at the moment.

The probelm is that you your parents may own lots of assets which have a large value for inheritance tax purposes ,but which don't generate any income (excluding share dividends and interest). The biggest thing is checking the rights of the surviving spouse to the deceased ones pension. Historically women have relied on their husband having a pension, but if the husband dies first the wife may not have an entitlement to the pension, or only a limited one.

My parents are going through this process now, of trying to make their assets work for them to generate an income if one of them (principally my dad) were to die.

Sorry if I have gone on. Its a really difficult area to discuss with your parents isn't it? You don't want them to die, but they can't avoid it either. My parents kick up the back side has been the death of some very close friends - all in their early 60's.

I saw an advert in the jobs and money section of the Guardian from last Saturday: John Charcol financial advisers are offering a free book about IT to Guradian readers: anyone got a copy in the re-cycling box with the number and code to quote?

thanks everyone, especially CD and Polingford who have articulated my concerns clearly and senisbley.
I will do the research and discuss the matters with my parents.
I think I started this thread with my knickers in a bit of a twist because I am feeling guilty about moving to Australia and leaving my sister to deal with things that may come. Plus mum and dad shelled out 8k to Everest to replace 5 windows this month. But they are adults and it was their decision (what troubles me is that it was hardly a competitive quote more an arbitrary figure)
and they say they will last for 25 years and if my parents are thinking they will be keeping their windows company for that length of time then isn't that confidence in the future priceless?

thanks again for the sensible advice

suzywong - some accountants and/or solicitors will give you a free consultation to discuss the best way to write a tax-efficient Will and they can look at your parent's specific circumstances which might be helpful.

Wanted to add - it is a very hard subject to bring up, but having just been through this myself, I know how worth it a good Will is. My father kept meaning to reorganise his Will, and was in the process of setting up a Trust for his grandchildren, but didn't get around to it properly. If he had done this and then survived 7 years, the IHT that we would have saved would have paid all the University costs for 5 grandchildren, which was his hope. Instead the tax man got the lot. Now, sadly there's nothing I could have done about my father dying before his time, but even if he had earmarked that money for his grandchildren in his Will then any income on that money would be deemed to be the children's and would be taxed accordingly. Instead, the money belongs to me and my sister and the income from it is taxed according to our incomes. Little things like that could make a huge difference.

Suzywong, any reasonable solicitor would be able to advise your parents on making a will. Ultimately this is the most important thing to do, unless they have already done it. Personally I would be wary in going in with loads of research and telling them what to do, I would simply ask how things stand at the mo, and make sure they do have a will. That is all you can do, let a professional help them in this as in the long run it stops the emotions running too high and means your parents are being treated as the grown ups they are.

My parents are open about the fact they have a will and trusts etc, but I would feel uncomfortable trying to tell them what to do.

we just saw a solicitor this week about wills etc. We have been advised to set up a Trust that kicks into action when one of us dies, then the survivor 'borrows' money from this Trust - all made sense at the time, but am having second thoughts about this now as no one else I know seems to have done this or know anything about it. The trust means that somehow we only have to pay tax when the second of us carks it - can anyone out there help me make more sense of this? it's cost us £400 with the solicitor to set this up, seems a bargain if it means that tax is less, but will have more fees when we die but apparantly minimal compared to potential tax bill. we aren't particularly rich, just have a 'normal' house, but with the tax threshold fairly low at £260kish then we would be subject to 40% to the taxman.

Are you married ?

not read all of the thread but just a quick one re: IH tax.

my dad didn't sort out my gran's finances before she died and she paid over £250k in tax. horrendous.

Springmum,
The sort of planning that you're talking about is intended to ensure that you can use both lots of the £260k-odd nil rate band. When spouse 1 dies then the first £260k is put into a trust for your children to inherit of the death of spouse 2. Rather than put actual cash in you can put an IOU into the trust, which will be payable on the second death. So on the second death the children (or whoever) get the £260k from the trust (with no tax), and another £260k tax-free. Without the trust, then usually Spouse 2 would get all of spouse 1 assets, and on their death kids get everything but only £260k tax-free.

It's a common enough scheme, and I guess your solicitor would look carefully at the detail.
However you should be aware that a lot of similar schemes are being blocked, and this one may also be on the list (ie if not this year, it may be targeted next year....).

It's a tricky one: none of us want to pay too much tax. I've taken a rather risk-averse approach on this one: I am loathe to get involved in this at this point as we are "relatively" young and have young children. I personally don't want to be in a position where if DH died suddenly, I would have some form of ongoing annual tax liability associated with the £260k trust which could say run on for 40 years or however long I live. My priority is to be able to provide for our children whilst they are young rather than to make them richer when they are old! So we are probably getting this removed from our will as some of the changes to tax law are being made retrospectively. But bear in mind we have very young children. If they (or we) were older I would feel differently.

Don't think anyone else has quite said this one... what my will currently says is that if I snuff it, my estate is divided so that 50% goes to DH and 50% to be divided evenly among my living natural children (but to be held in trust by DH until the age of 18). Reverse applies if DH dies before me. It just seemed like a simple solution that either of us could understand what it would mean.