IHT Planning Saves £800k
The Background
We were approached by a couple both in their late 70’s, who wanted to look at options for helping their grandchildren on to the property ladder, which also hopefully identifying ways to reduce their exposure to inheritance tax.
The couple’s only asset was there main resident, which was valued at circa £3m with no mortgage encumbrance.
They now had a modest income but no other assets or liabilities.
The Problem
As is often the case for elderly couples who have owned the same property throughout their life, the were asset rich but were unable to help their grandchildren on to the property ladder as they were essentially cash poor, as all of their wealth is in the property they live in and without selling the property, their wealth was essentially an unrealised gain.
They were unable to gift the property, as they would need somewhere to live.
Due to the value of the property, they were unable to benefit from the residential nil rate band so they only entitled to a joint nil rate band for inheritance tax purposes of £650k. This left them with £2.35m exposed to an inheritance tax rate of 40%, leaving them with a potential inheritance tax liability of £940k.
The Solution
The easy option would be to sell the property, downsize and make a cash gift to their grandchildren but this would involve selling the property which has been in the family for many generations, and also making an elderly couple move at a time in their life when the could probably do without this stress.
We worked closely with Mesa Financial, where we were able to look at the financial options available to them and the tax impact this would have.
The result was an equity release lifetime mortgage, that released cash from the property of £2m. This meant that they could make a cash gift to their grandchildren up to this amount.
By placing a mortgage encumbrance on the property, this reduced their chargeable estate by £2m, reducing their exposure to inheritance tax of £800k.
For the tax planning to reach its maximum efficiency, our clients simply need to survive the gift made to their grandchildren by 7 years, although substantial savings will be realised after year 3.
Although we are unable to advise on financial services products, by working with our professional network, we are able to advise on the tax implications of the options presented to our clients so they can make informed decisions after taking all options into consideration.
In this particular case, this was by far the best option as it achieved all of our client’s objectives.
