TT43: Family Inheritance Tax

November 22, 2003

Tax is a family matter
Previously in Topical Tips we have drawn attention to the need to take advice on family inheritance planning. The importance of this has been further emphasised by a real life case that received some publicity….
The DIY tax-planner’s tale
In an attempt to avoid the payment of local authority care home fees an elderly lady transferred her home into the names of her adult sons. Whilst she did not have sufficient assets to create an Inheritance Tax (“IHT”) problem should she die, the aim was to show that she did not have sufficient savings or assets to require a contribution to her future care fees. Fate was to intervene in this already dubious plan.

One of her sons died before she did.

This created an unusual problem. Although the elderly lady remained in occupation of the family home, her sons were its legal and beneficial owners. This meant that a half share in the family home was added to her deceased son’s estate in calculating his liability to IHT. As he had substantial other assets, this resulted in the value of half of his mother’s house being subjected to IHT at 40%.

But the problem didn’t end there. The mother’s continuing occupation of the property caused the gift to her sons to be a gift with a reservation of benefit – so it was also deemed to be in her estate for IHT purposes! At the time the value of her estate was low enough for there not to be a liability to IHT on her death, but this could change if the property increased in value dramatically.

To cap it all, it should be noted that the original gift to avoid care home fees was undoubtedly illegal and would not have been effective if the local authority had been aware of the circumstances surrounding it.
The moral of the story
We would always advise clients to take expert advice to ensure that family matters are planned in advance to properly take maximum advantage of the rules and allowances available.

Barnes Roffe Topical Tips

Consider your family requirements carefully

    • Take specific advice and plan a strategy to ensure your plans are tax efficient
    • Remember the three key planning points for wills:

1. Include a nil rate band discretionary trust in your will to ensure you pass on at least £255,000 of value on the death of a first spouse

2. If you have business assets that qualify for Business Property Relief (e.g. shares in an unquoted trading company) then plan to use the same discretionary trust to pass on the qualifying property to obtain the same relief a second time

3. Consider interest in possession trusts with overriding powers of appointment to pass on assets via a surviving spouse

  • Consider the more specific plans available for the protection of the family home and other assets
  • And remember, whilst IHT planning often involves the use of the interspouse exemption, there are key tax planning points for cohabiting couples

Topical Tips is designed to be a simple and useful source of ideas and information for clients and contacts of Barnes Roffe LLP. If you are unsure about the implications of any idea contained therein please contact your Barnes Roffe LLP partner. Barnes Roffe LLP cannot take responsibility if the ideas are implemented without its involvement.

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