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  1. Your HouseAsset or Liability A presentation by Tim Adams Barlow Robbins LLP Solicitors Guildford Godalming Woking

  2. 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

  3. 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

  4. 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)

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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”

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. 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

  18. 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

  19. ANY QUESTIONS? Thank you for listening Tim Adams