Simple inheritance tax advice

Simple inheritance tax advice

Didn't find your answer?

A friend of mine, around 75, has just sold his house in London and will pick up £600k in proceeds of which he will re-invest around £250k buying a house in Sussex.

He is a widower and has no plans to marry again but has three grown up daughters.

Beyond the annual £3k and the £250 gifts and making larger transfers but taking a punt that he may live another seven years, is there any simple inheritance tax mitigation he can do?

Replies (23)

Please login or register to join the discussion.

avatar
By paras007
06th Nov 2013 16:57

Have you considered wife's assets

What happened to the wife's assets when she passed away? Any unused IHT allowance would pass to your friend.

Thanks (0)
By Steve Kesby
06th Nov 2013 17:09

Why not...

... invest the £600K in AIM shares and borrow £250K to buy the new property. After a year you'll have 100% BPR on the AIM shares and a nil value in the estate for the property.

The AIM shares can be liquidated on death and after settling the mortgage there will be a property and £350K of cash to pass on without IHT.

Because of the FA 2013 changes it no longer works if you buy the new house out of the £600K and then later borrow the £250K to invest in AIM shares though.

Thanks (1)
Replying to Portia Nina Levin:
avatar
By joheart
11th Nov 2013 12:30

FA 2013 changes

Steve, what are the changes you are referrring to in FA 2013?

Thanks

Thanks (0)
avatar
By WhichTyler
06th Nov 2013 18:00

AIM

It's also quite possible that if you put it all in AIM shares, you wont have anything left at the end of the year and a £250k debt. Quite a high risk strategy for a 75 yo, I think

http://www.telegraph.co.uk/finance/personalfinance/investing/shares/10292350/Should-you-join-the-rush-into-Aim-shares.html

Thanks (0)
By Steve Kesby
06th Nov 2013 18:15

I did have in mind...

... a managed portfolio, but yes there's still risk. But then it needs to be balanced against the risk of still having the £600K and only passing £490K of it on.

As Paras says though, there may be two NRBs available.

Thanks (0)
avatar
By WhichTyler
06th Nov 2013 18:33

You must like a punt...

this is one for the 'friend' and the family to consider I think. Putting all your assets into a small-cap portfolio with 40% oil, gas, gold & silver explorers is no recipe for a relaxing retirement, I would venture...

Thanks (0)
By bro0010
07th Nov 2013 08:35

Normal expenditure out of income

Whilst not dealing with the £600k in any way, gifting away any excess income (after using the annual £250 and £3000 gifts referred to by the OP) at least prevents the estate from growing any more.  A surprising number of retirees of my acquaintance are still saving in their retirement!

Thanks (0)
avatar
By Anthony123
07th Nov 2013 09:05

AIM shares

I heard precisely the same advice at a conference recently and am pleased to see others reacted along the lines above. I thought I was totally missing some clever point. I think his family might rather be sure of a given amount on death and pay some tax than know Dad has risked it all on the offchance of saving IHT, There must surely be a balanced route between the 2.

I wonder what the daughters do for a living (or their spouses/children). If going for BPR route is there any way funds could be invested in businesses they run in a way that gets BPR? Family might be slightly happier about that sort of investment risk.

Thanks (1)
By gbuckell
07th Nov 2013 11:05

AIM shares etc

I have heard it said that AIM shares have about the same volatility as the main Stock Exchange if one avoids the riskier mining, oil and gas shares.  Also Steve did suggest a portfolio.

Two additional thoughts

1. Some advocate using contracts for difference to hedge against adverse AIM share price movements.

2. Given the amount available to invest there are a number of opportunities to create your own trading company which becomes a partner in one or more trading partnerships carrying on activities such as equipment leasing, farming, forestry, invoice discounting and property development finance.

Thanks (0)
avatar
By King_Maker
07th Nov 2013 11:13

What is his health like?

Care/medical fees might be more of a (future) priority, IMHO.

The AIM share scenario is a sort of text-book answer. None of the stockbrokers I know would recommend such a portfolio.

Thanks (0)
By Steve Kesby
07th Nov 2013 11:30

@ Basil

I was intentionally being rather flippant.

Hopefully it won't have escaped you that the title of the thread is an oxymoron.

As Paras observes we don't know how much of the OP's friend's late wife's NRB is still available nor how much of the friends NRB would be absorbed by gifts in the preceding 7 years if he died the day after execution of any planning.

We also don't know what other assets the friend has. I do think it's unreasonable to assume that a person's only asset is an empty house and that they are devoid of any other possessions.

In essence we're simply being asked to water the breeze, and so I liberally watered away.

I was alluding to three inter-related points though:

Paid for advice by someone who is in possession of full facts should be sought before the sale of the existing house, since that sale presents an opportunity for planning that won't be available afterwards due to the FA 2013 changes.A mortgage secured on a property reduces the value of that property, unless it gets caught by the FA 2013 changes.It used to be available planning (subject to the acceptance of risk) to borrow against a property and invest in assets qualifying for BPR or APR, but the FA 2013 changes mean that such planning is no longer available. It becomes available though when one asset is being sold and a new asset is being acquired.

Perhaps instead of AIM shares, he could acquire some agricultural land?

All investments carry risk though. Putting cash in Icelandic banks who pay a surprisingly good rate of interest is notoriously risky. A good investment manager can identify what will be most stable and what will be most volatile and select a portfolio that has a measured level of risk.

I agree with those who suggest that the view of the friend and is daughters as to how much risk (of being left with at least 60% of what was originally invested) is acceptable to them.

The friend and his daughters need paid for advice from someone armed with all the facts, and they might then need paid for advice on how to manage any risk they choose to take. There's potentially £240K+ of tax at stake. I think it would be money well spent.

EDIT: Crossed with Graham and King_Maker who make further good points that also indicate the need for specific advice.

Thanks (1)
the sea otter
By memyself-eye
07th Nov 2013 11:52

Of topic a bit

but a client of mine died in July. Left cash and equities (not on AIM) valued for probate at £1.1 million. Never married and only one relative, his sister, in his will. She had no inkling of his wealth as he lived in a council property and had no property assets of his own. Sobering to think if he had taken (or asked for) advice earlier an IHT charge of nearly 300k could have been mitigated. Before you ask, he was severely disabled, 84 years old and it is unlikely that at the stage I became involved (only last year) he would have understood the issues.

Thanks (0)
avatar
By MBK
07th Nov 2013 13:53

One minor point from your 1st post SK

He has to survive two years (not one) for BPR to kick in.

As for investments Octopus run a very successful IHT BPR investment scheme. That is NOT a recommendation!

 

Thanks (0)
By Steve Kesby
07th Nov 2013 13:59

Agreed

Thanks MBK. I was wearing my BPR head with my ER fingers!

Thanks (0)
avatar
By amgirling
07th Nov 2013 14:42

The Loan

The AIM Investment and hopeful attraction of BPR is all well and good, but I am a little concerned on the ability of a 75 year old to secure a mortgage/loan for £250K!

Thanks (0)
avatar
By tonycourt
07th Nov 2013 15:10

Not just for the text book

As MBK says;  Octopus run two types of AIM IHT planning portfolio, plus a search on the web will quickly throw up half a dozen or more stockbrokers and other investment companies offering so called IHT services using AIM shares.

If the client is risk averse and, despite their age, is insurable (life insurance) then a discounted gift scheme, offered by most major insurance companies will offer some immediate reduction in their estate for IHT purposes.

If neither of these suit then the client should at least aim to stop their estate growing and have a stab at reducing it (nothing ventured nothing gained):

Using s21 relief by making gifts of all excess incomeMaking gifts, which will be PETs, and hope he survives seven years If the client wants to retain capital for security he can make interest free personal loans, these could be written off at £3,000 a year using his annual exemption (I don't think a formal loan trust linked to a insurance investment bond is right for the circumstances, but one could be used)investing in woodlands that qualify for APR and woodlands relief (these are considered more secure than AIM and are available as open ended investment trusts and syndicate investments, but are less readily available than AIM shares) 

 

Thanks (0)
Derek French
By derek44
11th Nov 2013 12:01

Lobby the Government

Would be preferable if the IHT level was raised to something more sensible wouldn't it? That way people wouldn't have to waste time looking at schemes, risky or otherwise, to mitigate tax from the proceeds of sale of what is essentially a modest abode. I think my favourite film would be 'Honey, I Shrunk the Government'.

Thanks (0)
By The Minion
11th Nov 2013 12:04

@memyself-eye

Just a thought, but your severely disabled client want that way because of war time injuries by any chance. If he was you may want to look at the exemptions there

 

Thanks (0)
avatar
By The Black Knight
11th Nov 2013 12:39

I thoight it were SIMPLE they were after?

SIMPLE?

You could spend it on wine, women and Song and waste the rest.

Such a general question requires a full copy of the IHT book.

Take some advice on the matter is the correct answer!

Thanks (0)
By Steve Kesby
11th Nov 2013 13:01

FA 2013 changes

@joheart It used to be the case that, under S. 162(4) IHTA 1984, where a debt is secured on a property the value of the property is reduced by the amount of the debt.

If you then took out a loan secured on a property and then invested the money in something that qualified for APR or BPR (or gave it to your non-domiciled spouse, if you had one, who invested it in overseas assets - excluded property), then (once the qualifying criteria were satisfied) the effect is to remove the loan amount from the amount chargeable to IHT on death.

FA 2013 has inserted new Ss, 162A-162C which means that isn't possible in relation to transfers of value (including on death) on or after 17 July 2013. In relation to APR/BPR investments the changes only apply in relation to liabilities incurred on or after 6 April 2013. For the non-domiciled spouses with excluded property though, it's effectively retrospective legislation.

Thanks (0)
the sea otter
By memyself-eye
11th Nov 2013 14:01

Thanks, The Minion

His injuries were sustained in WW2, so unlikely that at aged 84 the exemption applies - but I'll check the death certificate. that would be some concession!  

Thanks (0)
avatar
By pauljohnston
12th Nov 2013 11:37

A bit more mudane

Shares in private Trading Companies subject to the requlations I believe attract BPR.  So if there is a family Company - something to consider

If any of the daughter's or their offspring are to marry there is a further IHT exemption. £5000 for children and £2500 grandchilden and £1000 for anyone.

Ofcourse there is the option of a new wife but this may cause more problems that its worth

 

Thanks (0)
the sea otter
By memyself-eye
23rd Jun 2014 13:21

War injuries relief - update

Thank you to 'The Minion'

I did apply for relief under Section 154 of The Inheritance Tax act 1984 and my client has, (repeat - HAS) been granted an exemption. She and her husband are now millionaires. Nice for them and I am now their favourite, if only accountant!

Thanks (0)