Question
My sister and I are trying to ascertain how we can avoid paying a large inheritance tax. My father died 5 years ago leaving my mum with business property presently valued at £600,000.00 and a home presently valued at £400,000.00.
We realise that the nil rate tax band is £325,000.00 and we have 65% of my fathers nil rate band left to use.
We have calculated that in the event of my mum's death this will leave us with an inheritance tax bill of £200,000.00.
Mum would be happy to put her home into our names but I believe technically she should then pay us rent.
Is this a viable option? I know the total effect relies on her surviving 7 years but what rent would she have to pay and in reality how would this work please?
Any other ideas?Answer
The key here is whether the business property is exempt from inheritance tax.
Under current inheritance tax rules a business or an interest in a business is usually exempt from inheritance tax, provided the deceased owned it for at least the two years prior to their death.
However, there are exceptions. Businesses that invest in shares or land/property are excluded, as are those whose shares are listed on a stock exchange. Also, assets owned by the business that are not used wholly by the business may not qualify.
In simple terms, if the business is an investment company or rental property it won't qualify. But if it's a bona fide trading business, e.g. manufacturing, professional services etc. then it probably will. You can read more details on the HMRC website.
Given what's at stake I think it would be well worth speaking to an accountant to clarify the position if you think the business property might be exempt.
If the business property is exempt then your mother's inheritance tax nil rate band, coupled with the remaining balance of your father's, should cover her home.
Otherwise, the challenge is to move your mother's assets out of her estate where practical. Provided she lives for at least 7 years after gifting assets they will fall outside of her estate for inheritance tax purposes. However, if she continues to derive any benefit from them (e.g. she continues to live in the home she's gifted to you) then she must pay rent at the prevailing market rate (you should be able to get an appropriate figure from a local estate agent) else HMRC will not recognise the gift.
If she has surplus income or can sell some of the business assets then this could work in her favour, as paying rent will move more assets out of her estate. But it obviously may not be practical.
She could sell the business assets if they don't qualify for business property relief then gift some of the money to you and your sister, but selling may incur capital gains tax so again you'll need to consult an accountant. And if she relys on an income from the business then this will need to be replaced somehow.
If she ends up with a large sum of money in her estate and would like to try and remove some without having to live another 7 years then a discounted gift trust is an option - although as they can pay financial advisers hefty sales commissions she'll need to be wary of mis-selling (and HMRC could disregard it if your mother didn't expect to live for at least 7 years when taking out the trust). Take a look at this earlier answer to find out more.
Given the potential complexities of this situation I think your mother could benefit from professional advice - an accountant would be a starting point. Nevertheless, I hope my answer makes things a bit clearer and points you all the right direction.
My sister and I are trying to ascertain how we can avoid paying a large inheritance tax. My father died 5 years ago leaving my mum with business property presently valued at £600,000.00 and a home presently valued at £400,000.00.
We realise that the nil rate tax band is £325,000.00 and we have 65% of my fathers nil rate band left to use.
We have calculated that in the event of my mum's death this will leave us with an inheritance tax bill of £200,000.00.
Mum would be happy to put her home into our names but I believe technically she should then pay us rent.
Is this a viable option? I know the total effect relies on her surviving 7 years but what rent would she have to pay and in reality how would this work please?
Any other ideas?Answer
The key here is whether the business property is exempt from inheritance tax.
Under current inheritance tax rules a business or an interest in a business is usually exempt from inheritance tax, provided the deceased owned it for at least the two years prior to their death.
However, there are exceptions. Businesses that invest in shares or land/property are excluded, as are those whose shares are listed on a stock exchange. Also, assets owned by the business that are not used wholly by the business may not qualify.
In simple terms, if the business is an investment company or rental property it won't qualify. But if it's a bona fide trading business, e.g. manufacturing, professional services etc. then it probably will. You can read more details on the HMRC website.
Given what's at stake I think it would be well worth speaking to an accountant to clarify the position if you think the business property might be exempt.
If the business property is exempt then your mother's inheritance tax nil rate band, coupled with the remaining balance of your father's, should cover her home.
Otherwise, the challenge is to move your mother's assets out of her estate where practical. Provided she lives for at least 7 years after gifting assets they will fall outside of her estate for inheritance tax purposes. However, if she continues to derive any benefit from them (e.g. she continues to live in the home she's gifted to you) then she must pay rent at the prevailing market rate (you should be able to get an appropriate figure from a local estate agent) else HMRC will not recognise the gift.
If she has surplus income or can sell some of the business assets then this could work in her favour, as paying rent will move more assets out of her estate. But it obviously may not be practical.
She could sell the business assets if they don't qualify for business property relief then gift some of the money to you and your sister, but selling may incur capital gains tax so again you'll need to consult an accountant. And if she relys on an income from the business then this will need to be replaced somehow.
If she ends up with a large sum of money in her estate and would like to try and remove some without having to live another 7 years then a discounted gift trust is an option - although as they can pay financial advisers hefty sales commissions she'll need to be wary of mis-selling (and HMRC could disregard it if your mother didn't expect to live for at least 7 years when taking out the trust). Take a look at this earlier answer to find out more.
Given the potential complexities of this situation I think your mother could benefit from professional advice - an accountant would be a starting point. Nevertheless, I hope my answer makes things a bit clearer and points you all the right direction.
Read this Q and A at http://www.candidmoney.com/questions/question317.aspx
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