Property-rich, Cash-poor Inheritance Planning

Property-rich, Cash-poor Inheritance Planning

Remembering all of the facts and options can be very confusing so here’s a generic explanation you should consider if this is you…

So you & your wife are retirement age, you have adult children and grandchildren. Say your  home is worth £500k, you rent out other property worth £400k, have some funds £50k and your house contents/cars are £35k = so £985k.

From 06/04/2020 as a couple your available nil rate bands (NRB), and residence nil rate bands (RNRB), will be £1M, so if you both died in the short term, no Inheritance Tax (IHT) would be paid, great! Move forwards 5+ years and the chances are your estate would suffer an IHT charge because property prices are more likely go up at a higher rate than both the NRB & RNRB, make sense?

You are effectively, property-rich & cash-poor, and this limits your options as far as you passing your estate down to the next generation. You realise that you can begin to pass your estate down whilst you are alive, and then the balance on death. At the very least you should be doing what you can to prevent your estate growing any higher in value.

What about trusts?

Whilst I personally think everyone should have a trust, you need to explore the reasons why you should have one, and understand the consequences of managing one now whilst you are alive, and what happens after death.

Principally, you must think about yourselves and your future needs. Don’t give anything away and leave yourselves short. When it’s gone, it’s gone.  Trusts can protect assets, e.g. against divorce (your own or the kids), bankruptcy, sideways disinheritance, care home fees to an extent, and are excellent as far as retaining the family’s funds so that the next generation can use them without the trust fund forming part of their estate, and this helps enormously with the next generation’s IHT planning. Also think of vulnerable or disabled adults, trust money can provide for them long term without jeopardising their right to means tested State Benefits.

All that said, what are your options? What should you consider doing?

You can only really do something with either your home, or the rented properties.

If you sell or gift the rentals away to family, there could be a sizeable chargeable gains tax bill to pay, probably a bad option, so don’t do it. Not good if you rely on the income as well in retirement. You should keep them in your estate, as is, enjoy the income and carry on. Important point to know is that, they’ll get a tax-free uplift at the date of death which wipes out any accumulated capital gain (so that’s good) but the tax is then replaced by IHT at 40% over the available NRB & RNRB’s. As the plan is to not have an estate above the thresholds, that won’t be a problem to you, will it? So keep the rentals, pass them on through your Wills to family.

In relation to your home, my recommendation is to downsize to a smaller property worth in the region of £300k which should release £200k in cash terms. Selling your home is CGT exempt because you will have Principal Private Residence Relief. You could then gift (some or all) of the cash to family in equal shares. Whatever they receive, ask them to tuck it away & not spend it all, just in case you ever need some of it back. Any gift made over £3,000 in a tax year is classed as a 7-year gift & remains in your estate for IHT calculations, but as I said earlier, that should never be a problem to you if you keep your estate under the £1M.

So, you should always keep your eye on the value of your estate, and compare it against your available NRB and RNRB’s.

In order to make sure your income doesn’t keep adding to your estate, here are some good tips you can use:

i. First, use your Annual Gifting Allowance each, you can give away £3,000 per tax year, and if you’ve never done it before you can go back one tax year as well.

ii. Second, you can gift excess income on a regular basis without it being classed as a 7-year gift. Calculating this and documenting it is where I can help guide you.

Your Wills may be quite old and should probably be updated; time has a habit of changing everything! We will need to make sure you make full use of ‘spouse exemption’ to preserve the first one to die’s NRB and RNRB’s for the second one to die’s Executors to claim full use of against the value of your whole estate, for IHT purposes.

Back to trusts for a minute, a discretionary trust could restrict the amount of RNRB’s that can be claimed, so beware if you are thinking you really want one in you Wills (ask us to help with the calculations). A life interest trust will not restrict your RNRB’s and you could think about incorporating these into your Wills, for plenty of good reasons!

Owning your home as tenants in common (rather than as joint tenants), means that on first death, the deceased’s share of the house will go into a life interest trust, gives the surviving spouse the right to use it, live in the house etc. without restriction or complication. When the surviving spouse dies, the default beneficiaries named in the first one to die’s Will then inherits that half of the house. The surviving spouse’s Will then gives the other half of the house to the same family beneficiaries; i.e. they get it all but from two sources, if you like. Why include a life interest trust? If the surviving spouse goes into a care home later in life, the Local Authority can/will charge that one’s half of the house but should not be able to touch the half in the life interest trust. So for a few hundred pounds, half the house value is protected, good value in my book!

Implementing the above is relatively straightforward, albeit a big step for anyone to sell & move, especially if you’ve been there donkey’s years. Also think about managing in a big house as you get older, let alone continuing to pay the bigger bills. You might even be able to spend what you might save on yourselves!

Anything more complicated than this, in my opinion, could open the gates to the law of unintended consequences. The law and HMRC do change the rules from time to time, which is why we all have to look out for ourselves! And keep asking questions…

Incidentally, I’ll mention the importance of Lasting Power of Attorney documents (LPA’s), we all should have them, and when I set them up for clients at the same time as new Wills, I offer a 10% discount overall. Worth thinking about. Keep on looking after the pennies…

Sorry for the dissertation-type blog! It is meant to be helpful… Any questions or points not addressed please ask or email me. Happy to help whenever you’re ready.

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