Avoiding inheritance tax


T

TonyJeffs

An ageing parent owns a high value 5 bedroom detatched house, and
decides to give it to her three children, to hopefully avoid
inheritance tax, and perhaps avoid paying nursing fees should that
ever become necessary.
All parties are certain that goodwill and friendly relations will
prevail, so that isn't a problem.
The parent signs over the house, and begins paying the three offspring
a rent of £1000 per month by standing order, to increase at 2%pa, or
an appropriate rate, under a shorthold/periodic tenancy agreement.
She also gifts her children with much of her savings.
She survives for over 7 years.

.........
Is that the way to do it?
Is it best to see an accountant or a specialist consultant?
Any reading recommendations, books, websites?
If so, any recommendations, Merseyside?


Many thanks

Tony
 
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J

Jonathan Bryce

TonyJeffs said:
An ageing parent owns a high value 5 bedroom detatched house, and
decides to give it to her three children, to hopefully avoid
inheritance tax, and perhaps avoid paying nursing fees should that
ever become necessary.
All parties are certain that goodwill and friendly relations will
prevail, so that isn't a problem.
The parent signs over the house, and begins paying the three offspring
a rent of £1000 per month by standing order, to increase at 2%pa, or
an appropriate rate, under a shorthold/periodic tenancy agreement.
She also gifts her children with much of her savings.
She survives for over 7 years.

........
Is that the way to do it?
Is it best to see an accountant or a specialist consultant?
Any reading recommendations, books, websites?
If so, any recommendations, Merseyside?
Possibly, if £1000 per month is a reasonable rent for the property. The
children will have to pay tax on this.

I don't know how it would work for nursing fees.
 
D

Derek *

Yeah, move to Yorkshire. ;-)
Possibly, if £1000 per month is a reasonable rent for the property. The
children will have to pay tax on this.

I don't know how it would work for nursing fees.
I can't comment on the tax aspects. But wrt nursing fees:

They need to formalise it by swearing a Deed of Gift (See a local
Solicitor) well before any question of residential care arises. Providing
they do that and a period (not formally stated but a couple of years would
be a good start, hopefully more) elapses before residential accomodation
is needed the council will have to accept that the reason she gave the
property to her children was that she wanted them to have it, and not to
stave off an imminent care home bill.

DG
 
R

Robert

An ageing parent owns a high value 5 bedroom detatched house, and
decides to give it to her three children, to hopefully avoid
inheritance tax, and perhaps avoid paying nursing fees should that
ever become necessary.
All parties are certain that goodwill and friendly relations will
prevail, so that isn't a problem.
The parent signs over the house, and begins paying the three offspring
a rent of £1000 per month by standing order, to increase at 2%pa, or
an appropriate rate, under a shorthold/periodic tenancy agreement.
She also gifts her children with much of her savings.

Remember that gifts out of income are not subject to IHT. As long as
she is not liquidating capital to do it I suggest she should pay the
minimum realistic rent and also make a regular gifts out of income.
The rent will be taxed as income by the recipients. The gifts out of
income will not be taxed ewither by the recipient or IHT.

For lifetime gifts to qualify as gifts out of income the executors
will eventually need to demonstrate that the gifts formed a regular
pattern and that they were out of income not capital.

Robert
 
R

r_mervart

Jonathan Bryce said:
Possibly, if £1000 per month is a reasonable rent for the property. The
children will have to pay tax on this.
If he/she lives for another 15 years say, the gift will cost the
giver a lot of money that will be taxed in the hands of receiving parties at
their highest tax rate.

roman
 
D

Daytona

It's a FAQ on uk.finance - search
<URL:http://groups.google.co.uk/groups?q=property+gift&hl=en&lr=&ie=UTF-8&group=uk.legal.*&sa=G&scoring=d>
and
<URL:http://groups.google.co.uk/groups?q...r=&ie=UTF-8&group=uk.finance.*&sa=G&scoring=d>

My only comment is that she will have greater security of tenure using
an Assured Tenancy. If she abides by the tenancy contract, the
landlords (offspring) have no legal rights to remove her. This can be
replicated under an Assured Shorthold Tenancy (AST) by giving a long
fixed period, however I believe that fixed periods of 3 or more years
move some of the maintenance & repair responsibilities from the
landlords to tenant, and even more so on 7 or more years. There is
likely to be Stamp Duty Land Tax (SDLT)
<URL:http://www.letlink.co.uk/Facts/Lfacts40.htm> charged to the
landlords with an AST, I'm not sure about an AT as by it's nature it's
undated.

Post again once you've got a handle on the (not inconsiderable) issues
!

Reading a Which? book would be a good idea -
<URL:http://www.amazon.co.uk/exec/obidos/ASIN/0852029462> and there's
a good specialist forum here
<URL:http://boards.fool.co.uk/Messages.asp?bid=51094>

hth

Daytona
(Landlord & tenant, not a lawyer)
 
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T

TonyJeffs

Thanks
I hadn't heard of a deed of gift before.

I calculate that the tax on the rent over even 25 years would be a
lot less than the inheritance tax.
eg
600k house over 10 years
Rental tax = 10 yrs x £12k(rent) x 40% tax = £48k
vs
IHT = 600k-260k x 40% = £160k

........................

What if the parent wants to divide the house unequally,
eg 1/3 to unmarried son A, 1/3 to unmarried son B, and the remaining
1/3 to be shared between the married son & his two children.
= 1/3, 1/3, 1/9, 1/9, 1/9
Can that just be written into the deeds in a fairly simple way, or
would it require the setting up of a limited company?

Tony
 
R

Ronald Raygun

TonyJeffs said:
I calculate that the tax on the rent over even 25 years would be a
lot less than the inheritance tax.
eg
600k house over 10 years
Rental tax = 10 yrs x £12k(rent) x 40% tax = £48k
vs
IHT = 600k-260k x 40% = £160k
12k is unlikely to be a realistic rent for a 600k house.

Typical yields are 5% in areas where rents have been depressed
by oversupply (too many folk on the BTL bandwagon), but 7%-10%
is a more reasonable long term average.

You're suggesting 2%. The IR will have you for breakfast.
 
T

TonyJeffs

Ronald Raygun said:
TonyJeffs said:
I calculate that the tax on the rent over even 25 years would be a
lot less than the inheritance tax.
eg
600k house over 10 years
Rental tax = 10 yrs x £12k(rent) x 40% tax = £48k
vs
IHT = 600k-260k x 40% = £136k [corrected]
12k is unlikely to be a realistic rent for a 600k house.

Typical yields are 5% in areas where rents have been depressed
by oversupply (too many folk on the BTL bandwagon), but 7%-10%
is a more reasonable long term average.

You're suggesting 2%. The IR will have you for breakfast.

Thanks to all, I'll look at the FAQ tomorrow - it's late

Ronald, I take your point.

I should look at at a more realistic equation for a 600K house,
thus:-
Rental tax = 10yrs x £50k(rent) x 40% tax = £200K
...which is substantially more than the IHT of $136k [correction!]


It seems that simply paying the lump sum cgt is not necessarily the
worst option of the two!
...............................

Suppose the parent decided to give the house to her children, and died
after two years, would the children incurr both tax on the rent and a
full IHT tax?


Thanks
Tony
 
T

TonyJeffs

So:-
Parent gives the £600,000 house to the children & grandchildren (15
people, some under 18).
New owners rent a room to parent at reduced rate which incorporates
allowances for management of house, cleaning, feeding students.(Rent,
perhaps £800 per month; standing order payment. Written contract. Deed
of gift)
New owners, not the mother, rent the other rooms to overseas students.
Contracts allowing shared use of certain rooms.
Mother responsible for feeding students, cleaning, shopping for
student food.

The 15 new owners pay tax on rents, (possibly £5000 p/a) . Overseas
language students typically stay for a few weeks. Rent is decided by
intermediate company, lessor has to take it or leave it (taxman cant
say it was deliberately set to evade tax).

TonyJeffs
usenet9 at tonyjeffs dot com
or
9usenet at tonyjeffs dot com
I'd be glad to pay for a telephone discussion or face-to-face
consultation with a lay expert, or ex-president on this and similar
matters!

X-noarchive: yes
 
T

Troy Steadman

So:-
Parent gives the £600,000 house to the children & grandchildren (15
people, some under 18)...
<snip a whole load of very bad news for elderly parent>

Mum pays rent on her garret room and is expected to buy and
cook food for all these students without being reimbursed?


--
 
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T

Troy Steadman

<snip a whole load of very bad news for elderly parent>

Mum pays rent on her garret room and is expected to buy and
cook food for all these students without being reimbursed?
Since she is going to be living in a flop-house with Italian
students who will abuse the phone-bill and piss down the side of the
toilet, why don't you persuade her to move into somewhere much cheaper
and nicer where she will be happy and live for the 7 years you need
for your plan to work?

http://www.mccarthyandstone.co.uk/careers/brief_history.asp



--
 
R

Ronald Raygun

Troy said:
Since she is going to be living in a flop-house with Italian
students who will abuse the phone-bill and piss down the side of the
toilet, why don't you persuade her to move into somewhere much cheaper
and nicer where she will be happy and live for the 7 years you need
for your plan to work?
What 7 years? It would have to be till death do them part.

Sure, an ordinary gift would be safe once 7 years had elapsed,
but this is potentially a gift with reservation, and so if she
moves back in after the piss-artists have, er, pissed off, and
does so without paying rent, this would call the whole gift
back into question, would it not?
 
T

Troy Steadman

Ronald Raygun said:
What 7 years? It would have to be till death do them part.

Sure, an ordinary gift would be safe once 7 years had elapsed,
but this is potentially a gift with reservation, and so if she
moves back in after the piss-artists have, er, pissed off, and
does so without paying rent, this would call the whole gift
back into question, would it not?
Well Ronald you miss my point completely here, McCarthy & Stone
properties are expensive to buy and she would presumably have to sell
the existing home to purchase a new one. There would be change out of
£600K which she might be minded to gift if it suited everyone's
purposes.

http://www.mccarthyandstone.co.uk

BUT what I said was "where she will be happy and live for the 7 years
you need for your plan to work?".

Correct me if I am wrong but would not the house slip out of IHT
consideration altogether after she has gifted it and lived elsewhere
for 7 years, allowing her to unreservation-edly move back into it
whenever she wished?
 
R

Ronald Raygun

Troy said:
Well Ronald you miss my point completely here, McCarthy & Stone
properties are expensive to buy and she would presumably have to sell
the existing home to purchase a new one.
Aha, I didn't register that you were planning for her to sell the
house.
There would be change out of
£600K which she might be minded to gift if it suited everyone's
purposes.
That would be fine, just gifting money. But then this scheme would
only avoid IHT on a fraction of the estate, and it might not be enough.
BUT what I said was "where she will be happy and live for the 7 years
you need for your plan to work?".
Yes, I heard that. My point was that if there is any reservation,
then any "gift" won't have been potentially exempt, so the 7-year
clock never even started, i.e. the plan simply would not work no
matter how long you waited.
Correct me if I am wrong but would not the house slip out of IHT
consideration altogether after she has gifted it and lived elsewhere
for 7 years, allowing her to unreservation-edly move back into it
whenever she wished?
No. If she reserves the right to move back into it, no matter when,
the plan is fatally flawed. There's also a more obvious fatal flaw:
If she sold the house 7+ years ago, how can she move back into it?
 
T

Troy Steadman

Ronald Raygun said:
No. If she reserves the right to move back into it, no matter when,
the plan is fatally flawed. There's also a more obvious fatal flaw:
If she sold the house 7+ years ago, how can she move back into it?
By selling 263/600ths of her house to her 18 offspring, gifting them the
remainder, moving into a McCarthy & Stone flat purchased for £263K this
coming November, "home" in time for Christmas 2011.


--
 
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R

Ronald Raygun

Troy said:
By selling 263/600ths of her house to her 18 offspring, gifting them the
remainder, moving into a McCarthy & Stone flat
Do you have shares in McC&S or why do you keep mentioning them?
purchased for £263K this coming November,
"home" in time for Christmas 2011.
And then what? Buy back the 263/600ths while the offspring continue
to operate the remaining 337/600ths as a B&B for Italian toy boys?
Yes, I guess that could work, but otherwise there could be an issue
over the gifted 337/600ths being deemed reserved from the outset.

Minor issue: Where would the offspring find the £263k to buy their
share off granny? I suppose they could get a BTL loan to be financed
by the Italians.
 

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