Should we gift our home and property to cut our IHT bill?
We own both this new property and our own home outright, and each is worth around £90,000.
We are in our late 50s and are trying to do some estate planning. We want to leave the rental property to our grandchildren and our own home to our four children.
A friend has advised us that we should put the rental property into a trust for our grandchildren and sign over our home to our children now. We are worried that if one of us has to go into a care home, we would have to sell our home to pay for care. Can you help us find the best course of action?'
'You are quite young to be looking at estate planning. If you and your husband are both in good health, you could feasibly live for another 40 years. So while it is fine if you want to make gifts to your children and grandchildren, you need to make sure that you won’t need to access the assets that you’re giving away.
Before looking at estate planning, you need to consider how much of an inheritance tax liability you would have. You and your husband will have a nil-rate-band allowance of £325,000 each and from 2017 an additional main residence nil-rate band will be phased in. Unless you have other significant assets, you may not have to pay any IHT.
Putting a property into trust isn’t at all straightforward. By doing this, you are giving away the property. There will be costs involved, potential tax implications and, as you don’t own the property, you won’t be able to use it for your own benefit.
For your own property, if you gift this to your children you would then need to demonstrate that you no longer have an interest in it by paying them a commercial level of rent.
There is also the risk that your children or grandchildren could decide to sell the properties in the future. Even if you trust them completely, if they get divorced their ex-partner could conceivably claim a share of the properties and even force a sale to access this share. This could mean you are turfed out of your home and have to find somewhere else to live.
In the future, if you or your husband has to go into care, your property won’t usually be taken into account for assessment purposes if the other one of you is still living there.
These are all really complicated and important issues. You are potentially risking your own standard of living in the future, so instead of listening to your friend you should really take professional independent financial advice.'
Patrick Connolly is a certified financial planner for Chase de Vere.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.