inheritance tax - anyway to avoid for Disabled son?

Hi Margaret,

I am in a similar kind of position with my Mum and, sadly, when I took out legal advice a few years back I wasbasically told that the rules are changing so often that something done today might not be enforceable tomorrow - i.e. in my Mum wanting to gift the house to me or myself buying part into the house, etc, etc.

Our biggest fear was my Mum - you should consider this - being taken ill and the local council wanting to take the house off her to sell it to pay for any care that she might need. Sadly, this is all too common nowadays.

One thing that I definitely think you should talk to a solicitor about is Enduring Power of Attorney - not just who looks after your son when you are no longer here (I don't know the extend of your son's disability) but also what happens if, frankly, you lose your marbles in the next few years. Then, sadly, what you want to happen re your OWN car and the care of your son might be taken out of your hands and complete strangers might be making the decision - it would probably be your local Social Services who, seeing the property you own, will no doubt lick their lips and, arguing that they are concerned about your well-being and not your sons, demand ownership of your property to pay for your care.

I really think you need to look into Enduring Power of Attorney and seek legal advice on the ramifications of it.

Sorry not to be more helpful.

John/

Sell!

What is the benefit to you or your son of an estate entirely composed of property, when it is clear it is cash you need?

Cash assets can be invested in trust, and then assuming you live seven years be outside of the scope of IHT whilst giving you the capability to control the means of investment - hence securing your son's future and avoiding IHT.

Use some of the money from sale to invest in trust and some out of trust - ie the funds out of trust generating the income you need to live on.

Simple really

Mc

If I sell the flat I will be taxed heavily and the money i previously invested with the Prudential lost not gained. where as the flat has gained in value by approximately 200% in 8 years. That is on top of the £800 a month rent. Could I invest cash with such returns? Would the cash be as secure as a property? Would i be reducing the income from my investment more than the IHT would take away?i suspect this could be the case although I would be happy to be wrong. finally do they not count money in trust to my son as his asset?

Our main house is in joint ownership and my Son has a clear mind but just physical problems ( it is in fact he who is posting this for me). Can thay take away part of the house if its in joint ownership? I thought it wouldn't be so. Although I understand they can still charge iht on it because I still live here

You would have to pay a lot less CGT this way, though, than your estate would have to pay IHT. Presumably the flat is worth less than the big house, and if the two together are worth 400k, let's suppose the flat is worth 120k so has a gain of 80k. Knock off maybe 5k for indexation allowance and selling expenses, and the gain becomes 75k. Taper relief would be 30% after 8 years, so that and the personal allowance brings the taxable gain down to about 44k, so the tax payable would amount to at most 18k, less if your existing income is below the higher rate threshold. That should leave 100k cash in hand.

You would lose out on future gain, of course, but remember that gain will simply add to the IHT liability. You would also benefit from not risking a *fall* in value.

Investing £100k cash should give you about half the lost rent, if in a saving account, but I guess it boils down to how soon you plan to die and over which period, therefore, you're amortising the difference between IHT and CGT. Waiting 2 more years before selling would beef up the taper relief to the maximum 40% [oops, I just realise the above 30% figure for TR is wrong because the clock for that didn't start until 1998, so you'd get only 20% now, which bumps up the CGT by 3k, and you would nown need to wait 4 more years to optimise taper relief].

I suppose the whole currency could collapse. But then we'd be in the shit anyway.

See above. Your call.

As you said you were living off the rent, the gift into trust which you made was not really effective. You might be better off reversing it altogether and dissolving the trust.

Consider moving into the flat and selling the house - no CGT.

In fact, consider moving into the flat and renting out the house for a few (at least 3) years before selling it. Depending on how long you've lived in the house, you'll have (under present rules) many years before any CGT would become payable.

They can't "take it away" in any case. They can merely force him to sell his share to raise the cash to pay for his care. But I guess so long as you still live there, they can't force him to sell his share.

The IHT would be due because you own it, not because you live there. I mean the IHT on your half of the value. Does he live in it too? If so, then if you gifted him half the house at some point in the past, there should be no IHT problem, since there would be no reservation of title on your part, since you are only "using" half the house, and you still own half the house.

...

The two problems are very different. Property owned and given away with a retention of interest (right of use, etc.) remains in the taxable estate of the donor. The question of being counted for state invalidity (etc.) benefits is quite different.

In the USA there is the possibility of a trust with defined benefits (Health Education Maintenance & Support, HEMS) that is not recognised for Medicare and for disability benefits. I think the easier way in the UK is a discretionary trust, for which the trustees are trusted relatives (professionals would probably cost too much).

The problem with giving away appreciated property that isn't your main residence is (as others have said) CGT. Property with dual use is pro-rated, so the only way out of that is to go abroad, sell the property in a tax year in which you are not resident or ordinarily resident in the UK and preferably do not set foot in the UK, and then remain abroad for several (3 or 5 as the case may be) years except for short visits. That's worth doing for a multi-million £ London house, but doubtless not in your case where your wealth probably wouldn't get you a Jersey, Guernsey or Alderney residence permit anyway. (And Spain, etc. bring their own IHT complications and don't recognise trusts.)

But there is the possibility of reducing the estate to below the IHT threshold by gifting to a discretionary trust the excess. Or borrowing against you rental property or home and putting that into trust. (Then there is the problem of PET - potentially exempt transfers: you've got to live another 7 years to avoid tax altogether.)

You really need an accountant to look at the CGT issue, because there are allowances and taper relief (a kind of allowance for inflation), and CGT takes as basis 1982 value plus improvements.

One possibility is to gift or sell your home and pay market rent to your child or mother or trustee. The person who advised that the law was changing was correct -- it just changed, and those who took advantage of a perceived loophole to put their homes in trust and live in them are now likely to be doubly taxed if they don't reform the trust. But you can still gift/sell and pay (taxable) rent.

Without knowing the facts of each case, it seems to me that a combination of mortgages (to reduce estate value) plus life insurance, trusts and offshore stuff would solve the problems. But it is likely that if you went shopping for expertise in these areas you would find only charlatans who would sell you rubbish at high commissions. That is the sad fact of life in UK financial services. YOU MUST EDUCATE YOURSELF FIRST.

Good luck.

This is of interest to us.

We have two properties in the UK, total value probably around 800k or a bit more, little mortgage (just 30k on one of them).

If we move to France permanently do we not have to worry about (UK) CGT if/when we sell them?

Assuming you are now domiciled, resident and ordinarily resident in the UK, then you need to follow a careful minuet to become nonresident and not ordinarily resident so as to avoid CGT on your UK properties. And furthermore, you need to be careful about falling within the French tax net -- both CGT and wealth tax (depending upon your total assets). Switzerland has no CGT, France does.

If your move is for retirement, you may also want to consider the IHT consequences. You are unlikely to be deemed non-UK domiciled unless there are particular facts not stated (and not assumed by me). UK IHT is based, in part, upon domicile or deemed domicile (17 of the last 20 years).

Cross-border tax issues need to be approached with care. Few professionals are competent in the area.

If you don't want to sell, one possibility is to transfer the property to a non-UK entity (Isle of Man LLC for example), which could take it out of the IHT net. You then need to take care that there is no deemed sale for CGT purposes. And if you use the property, you need to be absent from the UK most of the year (playing it safe, present less than 90 days) so as not to be taxed for use of the property as an employee or shadow director.

Finally, one should never underestimate the Inland Revenue, nor make assumptions about the rationality of UK (or any other) tax law. Sometimes one day's difference in departure or arrival can mean vast sums difference in tax.

The above are by way of example and do not represent a legal opinion on your situation, which is unknown to me.

Can you suggest a book, or whatever, that deals with IHT planning for the layman? Most of those I've looked at are like Microsoft help files, lots of different ways to do the same thing but no single method fully explained.

Eek, this could be very relevant to us, maybe we'd better move quickly! (See below)

Thanks for the info., it's not quite retirement (if we do it) it's "pre retirement".

To complicate matters we have been non-resident previously (we spent

When we decide what we are actually going to do I will then investigate this much more thouroughly but your comments above are a very helpful initial point from which to start looking.

One of the quaint things about British Law is that you are deemed a British 'subject' wherever you are and whatever you say you are unless you can proove otherwise - especially for taxes.

British subject? Most of the inhabitants of the UK and possessions are "British citizens". UK personal taxation is based on domicile, residence, ordinary residence and "doing business", and deemed status, plus a few odd connecting factors. Nationality is relevant only insofar as it relates to presumption of domicile. Once it is established that a person had a nationality, the onus is on that person to prove s/he no longer possesses it. Otherwise I should think your statement is not correct.

The other thing is that "nationality" is really a civil-law concept, only recently adopted by Britain. The common law has looked to "allegiance" and statute law to immigration control to deal with matters that other countries used nationality for. Once Britain joined the EC, it had to take further its integration of "nationality", begun with the 1948 law.

But you knew that already.

"stuart noble" different ways to do the same thing but no single method fully explained.

Start with the booklets available free on the Inland Revenue site; catalogue at:

The ultimate treasure is Simon's Taxes -- the encyclopaedic analysis of the law. But I would be very surprised if you were comfortable reading it! Taxes really arent't intended for the average Joe to understand. And they are not designed to be fair -- just to raise money and to pacify the lobbyists, the landed gentry who traditionally controlled Britain and the major corporations and newly rich who control it now.

Thanks, Tam. Library stuff seems to be aimed at accountants and IR literature just steers you towards professional advice. I don't want to do the job myself but it would be handy to know which direction to head in.