Words of Wisdom Sept 2018

Making an IHT bill disappear

“Post death inheritance tax planning between spouses pretty much ended with the advent of the transferrable nilrate band (TNRB) didn’t it?” Not necessarily…….

Those of us who are old enough to have been practising before the TNRB was announced in the 2007 Autumn Statement may also remember cases where the surviving spouse had automatically inherited the jointly owned marital home along with all other assets and died within two years of their better half leaving an estate worth more than the single nil-rate band of the day. An easy remedy straight out of the precedent books was to do a post death severance of the joint tenancy then vary the will or intestacy of the first spouse to die to send a half share of the house through the first estate to the survivor’s residuary beneficiaries. Both estates would then be below the IHT threshold. Thanks to the TNRB, we don’t have to do that any more.

But wait. The government’s own Inheritance Tax Manual instructs District Valuers to allow a discount of 10% on an undivided share in land where related property rules do not apply, even if the purpose behind the co-ownership trust has ended. On a house worth £500,000 that is £25,000 off the surviving spouse’s half share if the other half is owned by someone else. (Related property rules still apply if the surviving spouse has a life interest in the other half share)

Example: Mr & Mrs Jones (who have no children) owned a house jointly worth £500,000 and had £170,000 of investments between them. Mr Jones died in March 2017 leaving everything to his wife, and Mrs Jones died in July 2018. The whole estate passes to their only nephew under Mrs Jones’s will; there is on the face of it an IHT bill of £8,000 on an estate of £670,000. Dig out that old precedent and post death sever the joint tenancy; vary Mr Jones’s will to leave his half of the house to the nephew and residue to Mrs Jones. (£250,000 chargeable as related property rules apply; balance spouse exempt; £75,000 unused nil-rate to transfer). As a result, Mrs Jones will be deemed to co-own with the nephew at her death and the 10% discount can be applied to her half. Her estate is then £395,000 (£225,000 + £170,000) against her own NRB of £325,000 and a TNRB of £75,000: total NRB £400,000. 

An IHT bill of £8,000 disappears. If the house still sells for £500,000, there may be a CGT bill but one can deduct costs of sale – say £7,500 and apply the executors’ CGT allowance currently £11,700 and the balance is taxed at 28% (£1,624). CGT could be wiped completely if the nephew has a child, spouse or partner and is happy for his uncle’s half-share to be willed to them under the Deed of Variation. The property is assented accordingly so the heirs can sell as tenants in common in equal shares and use both their annual CGT allowances - £23,400

Sometimes it pays to think outside the box.