In the latest instalment of Money Talk, Linda* wrote to Express Money to gain insight on how to leave her estate to her daughter when she is no longer here. On hand to offer their perspective were Elaine Roche, Partner at Kuits, and Clare Julian, Wealth Planner at JM Finn, who provided further expertise on the Inheritance Tax question.
“You ask whether you should transfer the property to a trust now for your daughter. This is a possibility and so long as the property is worth less than £650,000 there will be no tax to pay now.
“However, if you die within seven years after making the gift into trust, the value of the property will still be included when calculating the inheritance tax when you die.”
Ms Roche also advised Linda and others that once they make a gift of the property, they will never be able to get it back.
As such, individuals should carefully consider whether they will need access to the value of the property as they get older.
However, Ms Roche concluded there may be other issues worth considering in further detail.
She said: “There are also income tax and capital gains tax issues to be considered when creating a trust. I would advise speaking to a specialist solicitor to create the trust as they will be able to talk you through how these might affect your specific circumstances.”
Also offering help on the matter was Clare Julian, Wealth Planner at JM Finn, who said: “As you indicate, each individual is entitled to an IHT free amount on death – known as the Nil Rate Band (NRB), it currently stands at £325,000 per person.
“Since 2008, the NRB has been inheritable between spouses, which means that, for a husband and wife, or two civil partners, they jointly may have up to £650,000 worth of Estate, which is completely free of IHT on second death. This scenario assumes the couple are leaving their seats to one another on first death under their Wills.
“In the example you provide, for simplicity sake let’s assume the couple have both left everything to one another on first date, their estate thereafter goes entirely goes entirely to their daughter, and there are no lifetime gifts or trusts to complicate matters.
“This couple would, we assume, have a transferable NRB between them of currently £650,000. It is the unused percentage of the NRB from the estate of the first to die which can be claimed on the second death.”
Ms Julian also considered the residence nil rate band, in place since 2017, and now entitles spouses to an individual allowance of up to £175,000 as standard, and is transferable between spouses.
There are a number of factors to consider within this residence nil rate band, most importantly, Ms Julian highlighted, applying to property.
She added: “It need not be the main residence, or the one you are indeed living in at the date of death. You may nominate a second home for example to be the one against which this additional IHT exempt amount applies.
“Someone who downsizes, or perhaps has to move into a care home therefore need not worry, as long as their Personal Representatives are able to nominate a property in which they have lived at some stage, this allowance can be considered.”
Ms Julian highlighted the relief is only applicable on property which goes to a direct descendant such as a child – in this case a daughter – or a grandchild, with adoptive children also included.
Zeroing in on the specific query, Ms Julian said: “If you have spent time living in the daughter’s property, you may indeed be able to nominate this property to be eligible for the RNRB, instead of the main residence, but only if you have lived there.
“If not, it could instead fall under the standard NRB, which allows for assets valued at up to £650,000 between the couple, to be IHT exempt.
“The final point about whether to place the property into Trust. If this property is to be nominated to be covered by the RNRB, placing the house into Trust on death, could, in some circumstances have an adverse effect.
“IHT planning, particularly with the RNRB can become complex. Placing the property into trust during your lifetime would potentially reduce the value of your estate after seven years but Trusts are a complicated area.
“My best advice here would be to seek specific, professional advice from a Solicitor, who should be given a full picture of your financial circumstances, and a good grasp of what you are hoping to achieve.”
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.
*Name has been changed.