Inheritance Taxes

[teddyboy]

Just been discussing things in work with some colleagues. I was pointing out that I dont understand why people use property as a pension fund. The reason I say this is simple.

Everybody I know who is retired DO NOT need a 3/4 detached that they have lived in for 30 years. They can live in somewhere smaller. But to them - whether the utilise the space or not, its their HOME (notice I said the word HOME and not house - it has sentimental value). So I started to think "do I actually know anyone who has downgraded? And the answer was NO for the reason stated.

Now that person can leave the house to their siblings as an inheritence. So what happens if I sold my house and then just moved into my mums house. My mum already own the deeds and no transaction will take place.

So if I did not pay a penny for the house - would the government still want 40% inheritence tax?

Could they force me to sell it for the 40%?

And also is transferring ownership of the property regarded as a capital gain? In theory my mum could sell me the house for 50P if she so wished?

Anyone know the score on this?

TB

[Goat]

IHT is based on the value of a persons estate at the date of their death. If your mother owns the house at that date then subject to the annual exemption (approx £250,000) it will form part of her estate and will be taxable.

There is nothing to stop your mother gifting you the house during her lifetime and (subject to the points below) this would not then be part of her estate for IHT purposes. A VERY STRONG WORD OF WARNING: although this can be done there are a lot of people who have done this and then been evicted by the beneficiaries, this is not a course of action that a professional advisor would normally recommend.

There are two further points to consider:

1. Gifts during lifetime are "potentially exempt transfers". If the giftee survives more than seven years then they are wholly exempt. If the giftee dies within 7 years then the assets form part of the estate, but reduced on a sliding scale.

2. If the house is gifted (or sold at an undervalue) then the giftee can not continue to live there, if they do then there are various anti avoidance rules that negate the IHT saving.

THIS COURSE OF ACTION SHOULD NEVER BE UNDERTAKEN WITHOUT DETAILED PROFESSIONAL ADVICE.

[zag2me]

http://www.hmrc.gov.uk/rates/inheritance.htm

[since the beginning]

THIS COURSE OF ACTION SHOULD NEVER BE UNDERTAKEN WITHOUT DETAILED PROFESSIONAL ADVICE.

Yup it always amazes me how selfish, nasty and money-grapping people can get over inheritance combined with some old people becoming senile and open to suggestion, then mix in relatives relying on Inheritance, Lottery wins etc to pay for here own pensions and it can becomes a right mess

[Goat]

There are a few circumstances where this may be appropriate but for the vast majority it would be a mistake.

[Bedsprings]

Young Goat - it's not an annual allowance of about £250,000, but a nil rate band!(actually currently £275,000) AA is £3,000.

Also if mum gave away the house, and wanted to avoid IHT she'd need to find somewere eklse to live, or it wouldn't work (in most circumstances).

There have been a lot of cases and groovy tax planning schemes to avoid IHT where elderly person wants to stay put, and still avoid the IHT. In many cases people will now be facing an income tax bill where they gave away a property in circumstances where they did avoid the IHT, under the new pre-owned assets legislation. This is a complex area - but you are right very few people sell up & give say half the money away, which is the easiest way of avoiding the IHT.

[Goat]

Young Goat - it's not an annual allowance of about £250,000, but a nil rate band!(actually currently £275,000) AA is £3,000.

Also if mum gave away the house, and wanted to avoid IHT she'd need to find somewere eklse to live, or it wouldn't work (in most circumstances).

There have been a lot of cases and groovy tax planning schemes to avoid IHT where elderly person wants to stay put, and still avoid the IHT. In many cases people will now be facing an income tax bill where they gave away a property in circumstances where they did avoid the IHT, under the new pre-owned assets legislation. This is a complex area - but you are right very few people sell up & give say half the money away, which is the easiest way of avoiding the IHT.

As mentioned £250,000 is the approx. figure, you are however correct that I misdescribed it as annual. Be careful with the £3,000 annual allowance because gifts from income are also exempt so potentially much more can be given away.

As also mentioned, there are very few cases where this would be appropriate, gifts with reservations and pre-owned asset rules are mentioned in my first reply.

These posts are meant as general guidance, not detailed tax planning advice. This is why I placed a large warning at the end of my first post.

Edited January 11, 2006 by Young Goat

[aussieboy]

SNIP.

THIS COURSE OF ACTION SHOULD NEVER BE UNDERTAKEN WITHOUT DETAILED PROFESSIONAL ADVICE.

And here's why:

http://theavengers.tv/forever/gale2-2.htm

[Zen-Master]

I have several clients who have down-sized in the past couple of years - with some more contemplating it.

They are all off SKIing (Spending the Kids' Inheritance).

[frugalista]

[...]

Everybody I know who is retired DO NOT need a 3/4 detached that they have lived in for 30 years. They can live in somewhere smaller. But to them - whether the utilise the space or not, its their HOME (notice I said the word HOME and not house - it has sentimental value). So I started to think "do I actually know anyone who has downgraded? And the answer was NO for the reason stated.

[...]

This is very interesting and exactly what I expected. I have this theory that there are millions of older couples living in houses far bigger than they need.

You say they don't trade down because they're sentimentally attached to the house. I am sure that is a factor. But I think one other reason is because they have experienced massive HPI over the 70s, 80s and also more recently and therefore they think they will actually be better off by hanging on to it for longer, possibly for ever.

I have this vague sense that what older people used to do was actually to downsize when they got into their late 50s. The released equity would contribute to their retirement. But I think this tradition has not been kept up with todays recent retirees.

The consequence of all this hanging on to propety is a kind of "blockage" in the supply chain. That is, perhaps there actually are enough bedrooms to go round, it's just that one demographic group is actually "hoarding" a load of them.

The market will eventually correct this. The question is, will it happen gradually or will a big load of larger houses come on the market at once? Remember 2006 is the year when the first baby boomers (born 9 months after VE day) turn 60!

Any thoughts?

frgualista

[Fancypants]

The consequence of all this hanging on to propety is a kind of "blockage" in the supply chain. That is, perhaps there actually are enough bedrooms to go round, it's just that one demographic group is actually "hoarding" a load of them.

I'd agree with this. My folks are in their late 50s and have four bedrooms to themselves.

I am 30 and share a shabbily built small 3 bedroom terrace with my girlfriend's family (5 inc me). Thankfully this is only temporary, but I think it illustrates something.

Most of my friend's parents are in very much the same situation - I have yet to see any evidence of downsizing going on amongst that bunch. The lane that my folks live on is populated by people 40+, the younger ones with families, the older ones with their empty nests... and no sign of shifting.

In fact, I'd reckon that the ones most likely to get flushed out in the coming years are those that are still paying mortgages. I do occasionally encourage my folks to get a move on and sell if they want to maximise their profits - this motivates Ma temporarily but she soon surrenders to my father's inherent inertia

[zorn]

This is very interesting and exactly what I expected. I have this theory that there are millions of older couples living in houses far bigger than they need.

Yes, this is what property taxes should solve. But instead of letting council taxes drive old people out of houses that are much too large for their needs, we have sob stories in the newspapers about granny being evicted because she can't pay her taxes, and there are all kinds of special grants and exemptions to let OAPs keep their large family houses instead of having to move out and make the house available for an actual family to live in.

[frugalista]

I'd agree with this. My folks are in their late 50s and have four bedrooms to themselves.

Thought I'd make a poll of it:

Poll: how many *empty* bedrooms in your parents' house?

frugalista

[Fancypants]

Thought I'd make a poll of it:

Poll: how many *empty* bedrooms in your parents' house?

frugalista

I cast my vote!

not that I'm necessarily complaining... I can treat the place as my own country retreat every so often and have a little bit of time and space to myself for a change!

I think even they have to admit though that they are not far off the time when it becomes too much for them to either manage or desire. In theory, at least, they are looking for a smaller place with more land.

they might well have "upsized" since I was born, but I can't remember ever living in a place without at least one spare room. I think they've always had at least 3bedrooms, even since before I was born and they were younger than I am now. And they paid for all this on one wage.

So what has changed for the youth of today?

anyway, sorry, off on a tangent there... old ground I know!

[Once in a lifetime]

When you die, your beneficiaries may have to pay inheritance tax on your estate.

But inheritance tax doesn’t apply only after death.

It may also be levied on certain gifts you make during your life.

Inheritance tax becomes due if the value exceeds a threshold set by the Inland Revenue.

Below this threshold, there is no tax to pay.

This tax-free threshold (known as the nil-rate band) is £272,000 for the 2005-2006 tax year

(£263,000 in 2004-2005). Realistically, this means that, if you own even a comparatively

modest house these days, there may be inheritance tax to pay

Inheritance tax (IHT) is charged on the running total of all gifts (including property)

that you make over seven years. But some gifts are free of IHT on death or during your

lifetime or both. Others – called potentially exempt transfers – are taxed only if you die within

seven years of making them. Bear in mind that, even though IHT may not apply, you may have

to pay capital gains tax if the gift is an asset rather than cash .

Start making gifts early

Giving away assets during your lifetime, thereby reducing the value of your estate,

will reduce your tax bill on death. You can also use your gift allowances to make fully exempt gifts.

If you can reasonably expect to live for a further seven years after making the gift, your

beneficiaries can fully escape tax by your using .

You will save the most tax by giving away those assets which you expect to increase most in value.

Use your will

You can also use a will for tax planning. Each person has a nil-rate band

(£272,000 in 2005-2006 tax year), so married couples together have an allowance

of £544,000. However, unless this allowance is used, on your death (through your will)

or by a deed of variation, it will be lost as it cannot be transferred to the surviving spouse.

By making some simple adjustments to your will, so that part of your estate passes to

your children rather than wholly to your spouse, you can substantially reduce the

inheritance tax bill when both you and your spouse have died.

In fact, your heirs could end up paying no IHT at all.

Take out insurance

You can reduce or eliminate the effect of inheritance tax by taking out an insurance policy

to cover the tax liability. But if you do this, you need to make sure that you put the

insurance policy into trust so that the proceeds don’t become part of your estate

(your insurance company can provide the necessary forms).

You can also take out seven-year reducing term assurance to pay any extra tax

that may become due if you die within seven years of making a lifetime gift.

Which.

[frugalista]

I cast my vote!

not that I'm necessarily complaining... I can treat the place as my own country retreat every so often and have a little bit of time and space to myself for a change!

One spare bedroom makes sense. Two (which my parents have) is maybe justifiable if you are wealthy (they're not) and expect a lot of visitors (they don't). I've tried to get them to downsize, they're not particularly sentimentally attached to the house, they just can't really be bothered with the hassle of moving.

Three or more bedrooms seems like they are really just hanging on for extreme sentimentality or speculation.

It's a bit of a waste of life; the oldies could downsize and fund a trip round the world in a hot air balloon (or whatever else brightens up those autumn years) and some kid somewhere would get his/her own bedroom.

frugalista

[Fancypants]

One spare bedroom makes sense. Two (which my parents have) is maybe justifiable if you are wealthy (they're not) and expect a lot of visitors (they don't). I've tried to get them to downsize, they're not particularly sentimentally attached to the house, they just can't really be bothered with the hassle of moving.

Three or more bedrooms seems like they are really just hanging on for extreme sentimentality or speculation.

Exactly the same with mine Frugalista... and I think they recognize it too. They just can't really be fussed with it. I don't suppose I blame them really, what's their incentive? They're not greedy people (which you may consider ironic given their overconsumption of housing resources) and are quite happy just pottering along I think

[Cinnamon]

One spare bedroom makes sense. Two (which my parents have) is maybe justifiable if you are wealthy (they're not) and expect a lot of visitors (they don't). I've tried to get them to downsize, they're not particularly sentimentally attached to the house, they just can't really be bothered with the hassle of moving.

Three or more bedrooms seems like they are really just hanging on for extreme sentimentality or speculation.

It's a bit of a waste of life; the oldies could downsize and fund a trip round the world in a hot air balloon (or whatever else brightens up those autumn years) and some kid somewhere would get his/her own bedroom.

frugalista

That sounds verrry patriotic, comrade frugalista! We must inform the central commitee and have the rentbrigades lead the revolution.

Cinnamon

[frugalista]

That sounds verrry patriotic, comrade frugalista! We must inform the central commitee and have the rentbrigades lead the revolution.

Cinnamon

Comrade cinnamon,

Maybe a revolution can be avoided with just a few tweaks to the Council Tax, adding some penalties for unused space?

frugalista