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I've been reading this post with great interest as it's something that's been troubling me recently too .... ie: How do I pass my wealth to my children without being robbed by 40% inheritance tax.
I don't claim to know all the answers - and I'm not qualified to know all the answers - but after a lot of research and thought - I am currently settled on the following strategies as my initial starting point:
1) DO A RONNIE CORBETT. What I mean by this is sell my Principal Private Residence (my home) and give the proceeds to my children and do this at least 7 years before I die. I reference Ronnie Corbett because this is EXACTLY what he did. He sold his £1million+ house back in the early 2000's and then lived in rented accommodation for the rest of his life (more than 7 years after the sale). I have an advantage over Ronnie in that I have a selection of other rental properties to live in (thereby saving the need to rent a place until I die). I'm planning on doing this when I'm around 65 and living until at least 72!
2) The second strategy (to reduce IHT) hasn't been mentioned by anyone - which astonished me!
This is that money can be given IHT TAX FREE "regularly" from SURPLUS INCOME and these regular gifts from surplus income are fully exempt from IHT as long as it can be shown that a) they are regular, b) the donors lifestyle isn't affected by the gift and c) it is not being funded by capital. So why continue to accumulate taxed income until you die (at which point it is taxed at IHT 40%) when you can give it away whilst you live. So .... with pensions and a healthy buy to let portfolio income building up in the bank ... isn't it time to be making regular monthly IHT free payments from these to the children?
As a generalisation, I would expect you parents could easily sustain their lifestyle on a thousand or two pounds income per month (and perhaps less) and the rest of the surplus income can be paid out IHT free for the duration of their life.
3) Currently, I am saving as much money as I am allowed into a personal pension with ZERO intention of drawing any of this money down. If I die before I am 75 then my children receive this totally TAX FREE and outside my estate for IHT purposes. If I die after 75 they basically inherit the pension pot which means, when they draw it down, they will be taxed at their marginal rate of tax. This may be too late for your parents but it is a useful strategy for younger landlords.
4) From age 60 onwards, I am going to make sure my wife and I use our IHT free gift allowances (of £3,000 each) ... so we can gift £6,000 capital each year. If we live to 75 then that will be £90,000 extra that won't be taxed at 40%
5) Finally, starting age 60, we are going to either sell or gift 1 property every year and move the proceeds to our children. We are going to keep doing this until we get down to a portfolio of 3 or 4 properties which will still generate enough income for use to comfortably live on. We will decide which properties to sell in the order of which create the lowest CGT charges after annual exemption. It also means, from age 60, we make sure we use up all of our annual CGT exemptions and we hope we live sufficient years (beyond 60) to ensure the majority of the gifted / sold properties become exempt for IHT purposes.
That's my current thinking and would welcome thoughts on any of this !
Somebody correct me if i am wrong but i believe that if you gift the proceeds of a sale each year the latest gift will set the 7 year PET clock back to zero for the total of all previous gifts IE Don't drip feed make one large gift
Hi Don,Thanks for your reply to my post. I hadn't realised the 7 year clock would get reset - but I realise it now! - so I am very grateful for your reply.
So a modified strategy is going to be to sell properties yearly (to maximise annual CGT allowances) .... but to only gift a lump sum every 7 years.
Thanks again !
I am with you on the Pension IHT
Its a super way of passing on wealth to your family
My intention is for all the property I own to go into trust and my shares in my company to do the same
HMRC allow the IHT on Land and Property to be paid over a 10 year time frame
The Property holdings would stay intact and IHT paid out of the cash flow
I also like the thought that Mortgages are IHT deductible so when I did the existing mortgagees I have will need to be refined by the trust
But it means less IHT
Of course writing Life Insurance in trust is also helpful
But pensions is by far the best method with out any shadow
Learn Change and Adapt ?????
James. Whilst many posters on public internet forums are well meaning tax and trust planning incorporating IHT mitigation is a very complex subject. This is certainly a case where finding a suitably qualified and ethical professional will cost a few thousand pounds in advice but will likely save you hundreds of thousands in IHT tax. If I were in your position I would go and see 3 solicitors who specialise in IHT & Trust planning, make sure they have the relevant STEP Society of Trust and Estate Practitioners qualifications. Most of them will give you basic examples of steps you can take and outline of the costs at an initial meeting free of charge. Good Luck.
Hello James, I'm a Chartered Financial Planner based in the West Midlands and have advised multi generation families on tax planning and been a Landlord for over 20 years. I have written many Bare Trusts for grandparents gifting assets including property. Typically the settlors (grandparents) gift property to a Bare Trust and the Trustees (usually the parents) manage the lets and rental profits reinvestment for the benefit of the beneficiaries (usually the grandchildren). Gifts to the trust (typically property and a small amount of cash into Trust bank account) are PETs for IHT purposes. CGT may be payable on disposal (gifting to the Trust). Disposal can be split in proportions over several tax years to utilise annual CGT allowances (currently £11,300 per person) and reduce the CGT liability. Gifted business assets may benefit from CGT holdover relief. Each beneficiary (usually a grandchild) each can utilise their annual personal allowance (currently £11,500), i.e. earn £11,500 rental profits tax free. This annual personal allowance is available from birth. This type of family tax planning works well if the grandparents can truly give up their properties and rental income and live a long time. Please contact me if you require more specific advice: 07810800499 email@example.com
That is a good way But I would imagine property would need to be unencumbered to do this
I like a Company for passing down wealth as I have borrowings
when I did my Shares go Family Trust and the Trust Pays the IHT from cash flow
I love pensions and Life Insurance for IHT planning its very simple and cost effective
Good thread - but my head is spinning now on the best way to pass it all on
So yes I need to pay for some good advice
Trouble is though rather selfishly it is never top of my to do list in the morning
And tomorrow morning will be no doubt the same again
Got two viewings to get stuck into before I even think about IHT
And then by the time i give it a look in - it will be time to wind down for the day
I guess it just nice to have the problem in the first place
I often think even if i do nothing and the bill is 40% ....
at least they get 60% more than if I had never invested in property in the first place
.60% of each 100K is better than 100% of Nothing
Well that`s my excuse anyway.
Now I wonder whether i will put in an offer today .......
Jonathan Clarke. http://www.buytoletmk.com
As you breathe your last an Estate Agent will call you for a viewing of a blinding deal.
You'll put off dying just for that one last deal.
You just can't help yourself!!
A true addict!!
Perhaps there should be a LL Anonymous cos you have the property addiction really bad!!!
Is property addiction a good thing!?
IHT can not really be defeated unless you give all your wealth away and even that can have a issue
I family I know ran a multi million pound business and the Grandfather passed all the weath to his son
after it was all completed the Son was killed in a helicopter crash and guess what IHT had to be paid
Its a bit like s24 If S24 effects you a strategy can be found but its not 100%
My estate goes into trust and the Trust will pay the IHT over a 10 year period on Land & Property
Life Insurance written in trust
Pension funds go tax free to the family as long as I die before 75
and if I die after there is some tax to pay
IHT is not going to be my problem I will not be here
Its Tax that has to be paid and that's the end of it
so get on do what you can and enjoy life that's my way of thinking