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Your House Asset or Liability A presentation by Tim Adams Barlow Robbins LLP Solicitors Guildford Godalming Woking Inheritance Tax

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your house asset or liability
Your HouseAsset or Liability

A presentation by

Tim Adams

Barlow Robbins LLP

Solicitors

Guildford Godalming Woking

inheritance tax
Inheritance Tax

“…broadly speaking, a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue”

Roy Jenkins, speaking in 1981

inheritance tax3
Inheritance Tax
  • Calculated on the value of a person’s estate at death and on certain gifts made during lifetime
  • First slice taxed at 0%- the “Nil Rate Band” -Currently £285,000
  • Balance taxed at 40% on death and 20% for certain lifetime transfers
potentially exempt transfers
Potentially Exempt Transfers
  • A gift from one individual to another is free of Inheritance Tax, if the donor survives for seven years
  • Very few transfers into trust qualify as PETs (the majority are now chargeable after Finance Act 2006)
the family home
The Family Home
  • Often the most valuable family asset, but it will attract inheritance tax if you fail to plan
  • But do remember, you have to live somewhere – the future can be uncertain
reservation of benefit
Reservation of Benefit
  • If a parent gives a house to a child who does not live with them, this is ineffective for IHT – Reservation of Benefit
  • Works if parent pays FULL market rent
  • Works if child lives with parent and remains there, paying a full contribution to the outgoings
tax mitigation schemes
Tax Mitigation Schemes
  • Most of these are now unattractive since the introduction of Pre-Owned Assets Tax in 2004.
  • A child can still buy a house from a parent, provided it is the entire interest, not just a share
  • Commercial equity release possible but expensive – last resort
downsize
Downsize
  • Sell the house, buy somewhere less expensive and possibly give away some of the surplus proceeds by way of PET
  • Consider your own future needs
  • Sale of one’s principal residence is CGT free
inheritance tax and your will
Inheritance Tax and Your Will
  • Making your Will provides an ideal opportunity to review your financial position and take some positive steps to reduce your potential Inheritance Tax liability
  • but first – an old chestnut
  • “Surely we will save Inheritance Tax by owning our house as tenants in common”
joint tenants tenants in common
Joint Tenants/Tenants in Common
  • Joint Tenants - Property automatically passes to surviving joint owner on first death, irrespective of provisions of Will
  • Tenants in Common - Share of property is part of estate and passes according to Will or Intestacy
  • No automatic saving of tax - depends on terms of Will
  • Usually necessary in any tax mitigation arrangements
the nil rate band
The Nil Rate Band
  • Currently £285,000
  • Each spouse is treated separately for Inheritance Tax purposes
  • Possible tax saving £114,000 on the second death
  • Benefit wasted if everything left to survivor on first death
will making strategies to reduce inheritance tax
Will making strategies to reduce Inheritance Tax
  • On the first death
    • Leave a legacy (cash or assets) of the “nil rate band” to the children as an outright gift
    • Leave a legacy of the “nil rate band” on discretionary trusts
outright gift by will
Outright Gift by Will
  • Is it affordable?
  • Possibly leave a share of the house to the children – but what happens if children suffer financial or marital problems (or predecease)?
  • Potentially effective for IHT provided survivor has no guaranteed rights to occupy
  • CGT disadvantages
nil rate discretionary trust
Nil Rate Discretionary Trust
  • On first death - Legacy of the nil band to trustees
  • Trustees can use trust fund for a range of beneficiaries, including the surviving spouse
  • Spouse has no automatic right to benefit
  • If care is exercised, trust fund should avoid being taxed on death of survivor
funding the nil rate trust
Funding the nil rate trust
  • What assets can be used for the trust?
    • Only assets “owned” by the deceased
    • Share of house? Not prior to Finance Act 2006, but now may be possible
    • Joint assets held as tenants in common
    • The “Charge” scheme
the charge scheme
The Charge Scheme
  • Enables the “nil rate gift” into a discretionary trust to be satisfied by requiring the trustees to accept a “charge” over assets passing to the survivor
  • Survivor can inherit whole estate subject to a liability/debt in favour of the nil rate trust
  • The Revenue accept (at present) that the basic arrangement is tax effective
anti avoidance
Anti-avoidance
  • S.103 Finance Act 1986 – debt may be disallowed where assets gifted by survivor during lifetime to first to die
    • Solution – leave residuary estate to survivor on life interest trust (IPDI)
  • Trustees must be careful to “manage” the trust to avoid allegations of a sham
deeds of variation
Deeds of Variation
  • It is possible to “rewrite” someone’s Will after their death to rearrange matters in a more tax effective manner
  • May be possible to insert retrospectively a nil rate discretionary trust
  • It is possible to “sever” a joint tenancy retrospectively
  • Strict time limit of two years from date of death
  • Not safe to rely on it – make a proper Will
any questions
ANY QUESTIONS?

Thank you for listening

Tim Adams