Senior Tax Manager Lucy Orrow has helped many clients with their Inheritance Tax and Estate Planning enquiries. In this series of Inheritance Tax case studies, we look at a typical scenario for Inheritance Tax and the implications of giving away wealth as a way of reducing the tax liabiliies in the long-term.
Meet brothers Sam and Steve and their Mum Sandra…
I was asked to visit a family where two brothers – Sam and Steve, wanted to help their mother Sandra understand her Inheritance Tax position following the death of their father. Sam and Steve also had families of their own but Steve was in the process of going through a divorce.
I visited the family and compiled an Inheritance Tax computation for each member to give a pictorial reference of what their liabilities may be.
Initially, it was determined that Sandra did not have a liability, however during our meeting it was discovered that a rental property which had been transferred into the Sam and Steve’s names many years ago was still having all its rental income paid to her. On this basis, it would have been a Gift with Reservation of Benefit (GROB) and so we adjusted Sandra’s Estate to include the rental property.
It was important to do this as Sandra required the rental income to live off.
Our Solution removed the IHT liability completely
Ultimately, although this increased Sandra’s Estate – on the understanding that she was leaving her main residence to Sam and Steve, the additional Main Residence Relief ensured that in the current tax year, she would have no Inheritance Tax liability.
Sam and Steve had more complex affairs and their Estates have been looked at separately resulting in further family meetings including bringing in Sam’s wife’s Estate and considering Steve’s divorce.
You can see from the schedule below, the value of property can have a significant impact on an Estate. However, sometimes just understanding the numbers can be as important to enable you to make choices and make decisions.
| Asset Type | With Rental | Without Rental |
| Main Residence | £425,000.00 | £425,000.00 |
| Rental Property | £280,000.00 | ~ |
| Personal Possessions | £25,000.00 | £25,000.00 |
| Bank and Building Society Accounts | £5,000.00 | £5,000.00 |
| Bonds | £169,000.00 | £169,000.00 |
| TOTAL ASSETS | £904,000.00 | £624,000.00 |
| Exemptions | With Rental | Without Rental |
| Gift Exemptions | £3,000.00 | £3,000.00 |
| Business Property Relief (BPR) | ~ | ~ |
| Agricultural Property Relief (APR) | ~ | ~ |
| Nil Rate Band | £325,000.00 | £325,000.00 |
| Transferrable Nil Rate Band | £325,000.00 | £325,000.00 |
| TOTAL EXEMPTIONS | £653,000.00 | £653,000.00 |
| TAXABLE ESTATE | £251,000.00 | £0.00 |
| Inheritance Tax Liability @ 40% | £100,400.00 | £0.00 |
| Main Residence Relief | -£60,000.00 | ~ |
| Transferrable Main Residence Relief | -£60,000.00 | ~ |
| £0.00 | £0.00 |
Conclusion
It is important to understand that not everyone has an Inheritance Tax liability but where you may have a home and a rental property, this could create a reasonable sized Estate on which Inheritance Tax could be due.
In this particular scenario, there have been children to which the main residence can be left but this may not always be the case. Therefore the main residence relief may not be available for everyone.
Our Inheritance Tax Case Studies demonstrate the need to act now to prepare for the future and protect the assets that you have worked hard to create. With a little forward planning, we can ensure that your Estate is left to those you wish to benefit from your hard work.
If you would like us to undertake a review of your Inheritance Tax position, please contact our Senior Tax Manager Lucy Orrow at the Braintree office.
Posted by Lucy Orrow
Disclaimer
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.