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Your House Asset or Liability

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broadly speaking, a voluntary levy paid by those who distrust their heirs more ... Calculated on the value of a person's estate at death ... Deeds of Variation ... – PowerPoint PPT presentation

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Title: Your House Asset or Liability


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 persons 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 ones 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 someones 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
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