IHT Planning Questions

[jdoe]

Situation is as follows:
- married partner has died, simple will leaves everything to spouse. Couple have only one adult son.
- when surviving spouse dies, everything is left to son but estate value likely to be around £1m (house) + £500k other assets.
- Son wishes to keep the family home
- Son already has a house (about £350k) but rents it out because he works abroad a lot. When in UK, he lives at parents house, which is his main UK address/residence, eg doctor, driving licence, electoral register etc.

Option 1
Surviving spouse inherits everything, as per will = no IHT. Very easy and simple.
Also inherits spouses £500k IHT allowance, making a total of £1m on second death
Then aims to get estate below £1m IHT allowance threshold before death (spending/gifting etc) and will everything to son = hopefully no IHT (obviously subject to PET rules).
Risk that house price increases over time (already around £1m)
Risk that IHT rules change over time, reducing the £1m joint allowance
Risk of gift-with-reservation issues if part of house is gifted to son by surviving parent

Option 2
House is owned as TIC, so could vary partner's will to leave their half of house (or up to £500k) to son now.
This would 'bank' deceased partner's IHT allowance.
Son lives in house as main residence, regardless of his work abroad, with surviving parent

Questions:
1. presumably there can be no gift-with-reservation issues if son inherits 50% of house from deceased parent, even though surviving parent continues to live in the house?
2. should the son/parent ownership be as TIC or JC? perhaps it doesn't matter?
3. Can the currently equal shares of TIC ownership between parents be varied after the death of one parent? My thinking here is that if, say, the house was valued at £750k then the deceased's parent's £500k IHT allowance would equal 2/3rds of the house value, so could their will be varied to leave 2/3rds of the house to the son, leaving 1/3rd owned by surviving parent (as TIC of course)?
4. Risks compared with option 1? (I'm not too concerned about 'falling out' risks as family relationships are very good - I know that's always a risk but it's one I'm willing to take. This is more about passing on the family home to my son without incurring IHT)

What does the panel think?
Thank you.

[genou]

Situation is as follows:
- married partner has died, simple will leaves everything to spouse. Couple have only one adult son.
- when surviving spouse dies, everything is left to son but estate value likely to be around £1m (house) + £500k other assets.
- Son wishes to keep the family home
- Son already has a house (about £350k) but rents it out because he works abroad a lot. When in UK, he lives at parents house, which is his main UK address/residence, eg doctor, driving licence, electoral register etc.

Option 1
Surviving spouse inherits everything, as per will = no IHT. Very easy and simple.
Also inherits spouses £500k IHT allowance, making a total of £1m on second death
Then aims to get estate below £1m IHT allowance threshold before death (spending/gifting etc) and will everything to son = hopefully no IHT (obviously subject to PET rules).
Risk that house price increases over time (already around £1m)
Risk that IHT rules change over time, reducing the £1m joint allowance
Risk of gift-with-reservation issues if part of house is gifted to son by surviving parent

Option 2
House is owned as TIC, so could vary partner's will to leave their half of house (or up to £500k) to son now.
This would 'bank' deceased partner's IHT allowance.
Son lives in house as main residence, regardless of his work abroad, with surviving parent

Questions:
1. presumably there can be no gift-with-reservation issues if son inherits 50% of house from deceased parent, even though surviving parent continues to live in the house?

I don't see any risk of reservation of benefit. There should be a reasonable allocation of the running costs/ repair bills of the house or some explicit recognition that there are gifts out of income going on.

2. should the son/parent ownership be as TIC or JC? perhaps it doesn't matter?

Joint would remove the house from probate on the second death. Otherwise nothing at stake.

3. Can the currently equal shares of TIC ownership between parents be varied after the death of one parent? My thinking here is that if, say, the house was valued at £750k then the deceased's parent's £500k IHT allowance would equal 2/3rds of the house value, so could their will be varied to leave 2/3rds of the house to the son, leaving 1/3rd owned by surviving parent (as TIC of course)?

I do not believe that you can alter the percentage ownership post-mortem.

4. Risks compared with option 1? (I'm not too concerned about 'falling out' risks as family relationships are very good - I know that's always a risk but it's one I'm willing to take. This is more about passing on the family home to my son without incurring IHT)

What does the panel think?
Thank you.

It seems unlikely that either the exempt amount or the RNRB will be increased any time soon, so using their value now seems to carry no downside. Transferring a share in the house now would move any increase in value of that share out of the remaining parent's estate. If both the parent and son are in residence until the second death, then standard valuation procedure would be to knock off 15% from the undivided value of the house - https://www.gov.uk/guidance/inheritance ... ded-shares . Even if the son is not in residence, a 10% deduction should be available. So you would be getting a decent lowering of your estate for IHT purposes. Option 2 seems not a bad choice.

You might get a better rate/ quality of answer if you post a link to your original post on the Taxes board.

I am sorry for your loss.

[scrumpyjack]

I do not believe that you can alter the percentage ownership post-mortem.

AFAIAA a Deed of Variation can vary in effect what goes to whom in a Will up to 2 years after death, as long as all affected beneficiaries agree.
If the DOV affects IHT you have to notify HMRC.

I don't know if there are any special rules that prevent this applying to specific assets such as the house, but I have not heard of any such rules?

[genou]

I do not believe that you can alter the percentage ownership post-mortem.

AFAIAA a Deed of Variation can vary in effect what goes to whom in a Will up to 2 years after death, as long as all affected beneficiaries agree.
If the DOV affects IHT you have to notify HMRC.

I don't know if there are any special rules that prevent this applying to specific assets such as the house, but I have not heard of any such rules?

I don't believe a DoV is relevant to this issue. You can't alter the destination of an asset the the testator did not own ( i.e. more than 50% of the house ).

[scrumpyjack]

I do not believe that you can alter the percentage ownership post-mortem.

AFAIAA a Deed of Variation can vary in effect what goes to whom in a Will up to 2 years after death, as long as all affected beneficiaries agree.
If the DOV affects IHT you have to notify HMRC.

I don't know if there are any special rules that prevent this applying to specific assets such as the house, but I have not heard of any such rules?

I don't believe a DoV is relevant to this issue. You can't alter the destination of an asset the the testator did not own ( i.e. more than 50% of the house ).

Yes of course, can't have read the OP properly!

[jdoe]

Situation is as follows:
- married partner has died, simple will leaves everything to spouse. Couple have only one adult son.
- when surviving spouse dies, everything is left to son but estate value likely to be around £1m (house) + £500k other assets.
- Son wishes to keep the family home
- Son already has a house (about £350k) but rents it out because he works abroad a lot. When in UK, he lives at parents house, which is his main UK address/residence, eg doctor, driving licence, electoral register etc.

Option 1
Surviving spouse inherits everything, as per will = no IHT. Very easy and simple.
Also inherits spouses £500k IHT allowance, making a total of £1m on second death
Then aims to get estate below £1m IHT allowance threshold before death (spending/gifting etc) and will everything to son = hopefully no IHT (obviously subject to PET rules).
Risk that house price increases over time (already around £1m)
Risk that IHT rules change over time, reducing the £1m joint allowance
Risk of gift-with-reservation issues if part of house is gifted to son by surviving parent

Option 2
House is owned as TIC, so could vary partner's will to leave their half of house (or up to £500k) to son now.
This would 'bank' deceased partner's IHT allowance.
Son lives in house as main residence, regardless of his work abroad, with surviving parent

Questions:
1. presumably there can be no gift-with-reservation issues if son inherits 50% of house from deceased parent, even though surviving parent continues to live in the house?

I don't see any risk of reservation of benefit. There should be a reasonable allocation of the running costs/ repair bills of the house or some explicit recognition that there are gifts out of income going on.

I couldn't see a gift-with-reservation issue either, but it's helpful to have that view reinforced. Good point about the house running costs though - I hadn't thought about that, though it shouldn't be too difficult to address going forward now I'm aware of it, so thanks for that.

2. should the son/parent ownership be as TIC or JC? perhaps it doesn't matter?

Joint would remove the house from probate on the second death. Otherwise nothing at stake.

Good point about taking the house out of probate by joint ownership. I guess this is more of a longer term issue and might be more important if/when son has a family and might want similar flexibility on my death. My understanding is that joint/TIC ownership can be easily changed at any time, so probably not an immediate issue.

3. Can the currently equal shares of TIC ownership between parents be varied after the death of one parent? My thinking here is that if, say, the house was valued at £750k then the deceased's parent's £500k IHT allowance would equal 2/3rds of the house value, so could their will be varied to leave 2/3rds of the house to the son, leaving 1/3rd owned by surviving parent (as TIC of course)?

I do not believe that you can alter the percentage ownership post-mortem.

I must admit I would have been surprised if this was possible, but I simply didn't know either way. Assuming the 50/50 split cannot be changed, I guess it would be advantageous to have the house valued as low as possible? It's not an easy house to value because it is not on an estate of similar houses, is listed and is also undergoing renovation, so I believe it could be legitimately given a low valuation (I'm getting a professional valuation next week). The lower the valuation then the less of the spouses £500k IHT allowance would be required to pass on their 50%, potentially leaving some to carry over to my future allowance.

4. Risks compared with option 1? (I'm not too concerned about 'falling out' risks as family relationships are very good - I know that's always a risk but it's one I'm willing to take. This is more about passing on the family home to my son without incurring IHT)

What does the panel think?
Thank you.

It seems unlikely that either the exempt amount or the RNRB will be increased any time soon, so using their value now seems to carry no downside. Transferring a share in the house now would move any increase in value of that share out of the remaining parent's estate.

Yes, that was my thinking, especially as - notwithstanding normal market price increases over time - I anticipate the house increasing in value as the current renovation works progress.


If both the parent and son are in residence until the second death, then standard valuation procedure would be to knock off 15% from the undivided value of the house. Even if the son is not in residence, a 10% deduction should be available. So you would be getting a decent lowering of your estate for IHT purposes. Option 2 seems not a bad choice.

I hadn't heard of anything like that, which could be very significant for IHT purposes. Thank you for that point, I shall certainly investigate that!


You might get a better rate/ quality of answer if you post a link to your original post on the Taxes board.

OK, will do. I posted here because I was thinking it more of a legal than a tax issue, but you're right that it crosses the boundaries really.

I am sorry for your loss.

Thank you - you've been a great help.

[Steveam]

I’m sorry for your loss. I know nothing of your circumstances and understand that you’re not too worried about relationship with your son who is working abroad but consider how things might change … he meets and settles down with someone, he decides to stay abroad, he falls on hard times, you want to move to a smaller property or change your lifestyle, you meet someone. There are many variations on this. Is it really worth trying to save some possible tax at the margins to take these risks and/or lose flexibility?

Helping your son in every way is lovely. Binding both of you together is something to think very carefully about.

Best wishes,

Steve

[Lootman]

should the son/parent ownership be as TIC or JC? perhaps it doesn't matter?

Joint would remove the house from probate on the second death. Otherwise nothing at stake.

I would just add that if the assets can be structured so that they are all owned as joint tenants, then there would not normally be any need to go through the probate process at all. Especially since the son wishes to retain the home and not sell it. For me that would be a major bonus.

There may still be IHT to pay depending on the value of the estate and the IHT rules at the time. But that can be handled outside of probate.

[Steveam]

Also don’t forget that your son will now “own” two properties - this has implications for stamp duty and CGT - he already has the CGT issue as his other property is not his primary residence but he might find it expedient to move there at some point in the future.

Best wishes,

Steve

[Eboli]

A few small points:


1. Remember that it is not the deceased's nil-rate band or main residence allowance that is 'inherited' by the survivor. The survivor's nil-rate band and main residence allowance are both increased by the same percentage that those allowances were not used by the first deceased. In consequence if either allowance increases (or decreases) the total amount 'inherited' by survivorship will not necessarily be £500,000.

2. If there is a Deed of Variation then this takes effect immediately before death and is as if the deceased had willed it. And as the chargeable value transferred is from the deceased there can be no reservation of benefit as the deceased cannot reserve a benefit!

3. You should avoid transfers of value from the survivor to anyone after death in the case of property because of the enormously wide pre-owned asset rules. Therefore, although it would be possible to alter the ownership percentages held as tenants in common you should be aware charges could arise under the pre-owned asset rules. Far better to get the changes made by a deed of variation.

According on your options per the opening post:

Option 1:
The second risk has a positive side: Benefit if IHT nil-rate band is increased or main residence allowance is increased between the two deaths.

Option 2:
On the questions
1. I agree.
2. Joint Tenants would avoid probate fees (as mentioned already by Lootman) and either TIC can unilaterally severe the joint tenancy subsequently if desired.
3. Any post mortem alteration of the interests could involve pre-owned assets as well as reservation of benefit and is best avoided.
4. The main risk that should not be ignored is a reduction in the capital value of the survivor's estate which perhaps may never be material until the unfortunate happens... But that is a matter of personal judgment rather than tax. But Steveam's comments are relevant and well made.

In addition:

As hinted at by genou if the deceased wants to pass a TIC interest in whole or in part to someone else this may amount to a disclaimer rather than a DoV.

Best wishes,

Eb.

[jdoe]

Phew! Thank you for all the comments. I need a bit of time to get my head around all the issues and permutations - some of which I hadn't considered, so thanks for the valuable suggestions. I'll be back with more questions!

[jdoe]

should the son/parent ownership be as TIC or JC? perhaps it doesn't matter?

Joint would remove the house from probate on the second death. Otherwise nothing at stake.

I would just add that if the assets can be structured so that they are all owned as joint tenants, then there would not normally be any need to go through the probate process at all. Especially since the son wishes to retain the home and not sell it. For me that would be a major bonus.

There may still be IHT to pay depending on the value of the estate and the IHT rules at the time. But that can be handled outside of probate.

Can 'joint ownership' apply to any type of physical property?

I understand that a house can be jointly owned, such that on the first death the ownership automatically reverts to the survivor, but what about other property, say a car for example?

The context for this question is that my late wife and I always maintained joint bank accounts and even though we both earned different amounts we always treated everything we earned as 'our' money, hence the joint accounts. So, in practice, everything we ever bought was via our joint account and my view is that everything we had would be jointly owned and therefore automatically 'inherited' by the survivor on first death.

Is this assumption correct, as it would seem to have implications regarding the probate process, rather than trying to separate out specific belongings of each partner?

[jdoe]

Also don’t forget that your son will now “own” two properties - this has implications for stamp duty and CGT - he already has the CGT issue as his other property is not his primary residence but he might find it expedient to move there at some point in the future.

Best wishes,

Steve

Good point about the stamp duty implications of owning two properties, but can I clarify exactly what 'property' means in this context, as in does this only apply to 'dwellings' or to any land-based 'property'?

For example, would a basic agricultural field/paddock with no buildings and no residential permission be considered a second 'property' as far as the multiple property stamp duty rules are concerned?

[genou]

For example, would a basic agricultural field/paddock with no buildings and no residential permission be considered a second 'property' as far as the multiple property stamp duty rules are concerned?

It has to be a residential property.

[genou]

Can 'joint ownership' apply to any type of physical property?

I understand that a house can be jointly owned, such that on the first death the ownership automatically reverts to the survivor, but what about other property, say a car for example?

You can own everything from the pots and pans to the Rembrandts jointly. You might get looked at askance if you claim to jointly own your spouse's clothes, but it is perfectly possible legally. For valuable stuff - say artwork, jewellery ( and that car ) you might want some written evidence. But if you are buying from a joint account, I'd take that as decent evidence of joint ownership if there is nothing to the contrary written down.

[Lootman]

Joint would remove the house from probate on the second death. Otherwise nothing at stake.

I would just add that if the assets can be structured so that they are all owned as joint tenants, then there would not normally be any need to go through the probate process at all. Especially since the son wishes to retain the home and not sell it. For me that would be a major bonus.

There may still be IHT to pay depending on the value of the estate and the IHT rules at the time. But that can be handled outside of probate.

Can 'joint ownership' apply to any type of physical property?

I would say there are two cases depending on whether the ownership has to be registered or not. So for properties and land it obviously has to be registered and that is easily done in joint names. For a vehicle there is a registered keeper but that can be different from the vehicle owner(s).

For items that require no registration then joint ownership would normally be assumed if the item were purchased from a joint account in the manner you suggest.

In any event I would claim all items as jointly owned and then the onus would be on the taxman to prove that some were not, or else accept your claim as is. At least for married couples I would not expect HMRC to question that since they won't be getting any IHT anyway.

[9873210]

For anything going to a spouse: doesn't the unlimited gift and estate tax exemptions make which spouse owns what mostly moot for estate tax purposes? It might affect the line where the value is reported, but shouldn't affect the tax.

[jdoe]

I would just add that if the assets can be structured so that they are all owned as joint tenants, then there would not normally be any need to go through the probate process at all. Especially since the son wishes to retain the home and not sell it. For me that would be a major bonus.

There may still be IHT to pay depending on the value of the estate and the IHT rules at the time. But that can be handled outside of probate.

Can 'joint ownership' apply to any type of physical property?

I would say there are two cases depending on whether the ownership has to be registered or not. So for properties and land it obviously has to be registered and that is easily done in joint names. For a vehicle there is a registered keeper but that can be different from the vehicle owner(s).

For items that require no registration then joint ownership would normally be assumed if the item were purchased from a joint account in the manner you suggest.

In any event I would claim all items as jointly owned and then the onus would be on the taxman to prove that some were not, or else accept your claim as is. At least for married couples I would not expect HMRC to question that since they won't be getting any IHT anyway.

Yes, that's my feeling as well. Why should I have to jump through hoops to prove something instead of simply stating it? I appreciate there are dishonest people out there but I also believe in the principle of 'innocent until proved guilty' so it seems reasonable for the onus to be on HMRC to prove otherwise.

In my case, I'm more than happy for HMRC to trawl through my banking history if they wish. In almost 40 years of marriage the only time we've had individual bank accounts has been to take advantage of good deals (eg Santander 123 accounts until their recent changes) and even then the only payments/debits were from our main joint account into which any income for either of us was paid and from which all bills, cards, mortgage etc was paid out. Neither of us ever considered any of our money or assets as being individually owned. The only legal exception was our modest share portfolio and pension funds, but that was only because such things cannot (as far as I know) have joint owners. However, we both considered them to be joint assets and managed them accordingly.

[jdoe]

For anything going to a spouse: doesn't the unlimited gift and estate tax exemptions make which spouse owns what mostly moot for estate tax purposes? It might affect the line where the value is reported, but shouldn't affect the tax.

Indeed, which makes me wonder why it is necessary to go through the whole probate process in cases where a spouse leaves a will clearly stating that they leave everything to their husband/wife - which is exactly my situation. As you rightly say, there is no IHT payable, so why is there any need to report the value of the deceased's estate anyway?

Indeed, IS it actually necessary for me to apply for probate? Why is a death certificate and a legal will alone not adequate justification for my spouse's shares to be transferred into my name or for land registry to update our house title?

Sight of the death certificate alone has been enough for the banks to update our joint accounts into my single name and not even that has been necessary to change the name on utility bills. Likewise things like Amazon and Netflix accounts have been easily transferred into my name, online.

I perfectly understand the need for probate in more complicated circumstances, but I surely can't be unique in having probably the simplest possible situation to deal with, so it's frustrating to have to deal with more bureaucracy than seems necessary.

But perhaps I'm missing something somewhere - after all, I've never had to deal with anything like this before so am hardly an expert. Thank goodness for a sensible forum where I can at least discuss such things!

[Avantegarde]

For anything going to a spouse: doesn't the unlimited gift and estate tax exemptions make which spouse owns what mostly moot for estate tax purposes? It might affect the line where the value is reported, but shouldn't affect the tax.

Indeed, which makes me wonder why it is necessary to go through the whole probate process in cases where a spouse leaves a will clearly stating that they leave everything to their husband/wife - which is exactly my situation. As you rightly say, there is no IHT payable, so why is there any need to report the value of the deceased's estate anyway?

Indeed, IS it actually necessary for me to apply for probate? Why is a death certificate and a legal will alone not adequate justification for my spouse's shares to be transferred into my name or for land registry to update our house title?

Sight of the death certificate alone has been enough for the banks to update our joint accounts into my single name and not even that has been necessary to change the name on utility bills. Likewise things like Amazon and Netflix accounts have been easily transferred into my name, online.

I perfectly understand the need for probate in more complicated circumstances, but I surely can't be unique in having probably the simplest possible situation to deal with, so it's frustrating to have to deal with more bureaucracy than seems necessary.

But perhaps I'm missing something somewhere - after all, I've never had to deal with anything like this before so am hardly an expert. Thank goodness for a sensible forum where I can at least discuss such things!

I am no expert but, based on observing the probate procedure for my late father's estate, I think the answer is simple: it is to stop inheritors or executors lying through their teeth, and doing a bunk with the assets they have gathered from the estate of the deceased, before paying tax they should have paid. To gain probate ie the right to hoover up the assets, the executor has to show the court that the right amount of inheritance tax has been paid first. And that involves filling in forms to inform the Revenue of the sums involved, even if no tax is actually payable. Lying to the Revenue is, obviously, a very serious matter and no same person would do it. So once banks etc see that probate has been granted, even where no tax was payable, and that the Revenue is satisfied, all concerned can be assured that no-one is pulling a fast one.