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bigduckontax
bigduckontax, Accountant
Category: Tax
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My parents own a house, mortgage free value at £650,000. It

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My parents own a house, mortgage free value at £650,000. It is jointly owned. They also have a buy to let property valued at £350,000. Other assets include, savings and shares of £500,000. My father has a defined contribution pension, currently £300,000 invested.
My parents objective is to give there 4 children £100k each and perhaps set up a trust for 2 grandchildren of £100k
What are the inheritance/ capital gains consequences, could eis or vct schemes be used to minimise tax?
Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.
Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question. The UK does not have a gifts tax regime so gifts are outside the scope of UK tax and recipients receive gifts tax free and the donor is similarly not affected, but see below. They can thank their lucky stars that they don't live in France where Gifts Tax kicks in at 5K Euros! Gifts do create problems with the donor's Inheritance tax (IHT) affairs. A gift creates a Potentially Exempt Transfer (PET) in the donors IHT affairs. PETs run off at a taper over seven years and in the event of a decease within this period are added back to the estate for IHT purposes. PETs are the first to suffer IHT and if the estate is insufficient to meet the IHT then the liability cascades down to the beneficiary for immediate payment. The classic defence against a PET is a reducing term life insurance policy. IHT kicks in at 325K plus any inter spousal or charitable bequests and is at a 40% flat rate. Spouses can inherit any unused portion of their partners 325K. If they sell their buy to let property then there will be a Capital Gains Tax (CGT) liability on the gain made on disposal. Each person has an Annual Exempt Amount (AEA), currently 11.1K, non cumulative, to offset any gain. Gains are taxed at 18% or 28% or a combination of the two rates depending on the individuals' income including the gain in the tax year of sale. Trusts are expensive to set up and operate. What with Trustees to be paid, 10 year exposure to IHT even if the settler isstill alive and other expense so is probably not worth the candle. Remember the cautionary tale of the two lawyers walking down the Royal Mile discussing their in dispute trust case before the Court of Session: 'You know, if we are not careful, there is a very real danger of the trusts funds being frittered away amongst the beneficiaries!' If your parents include their house in this largesse to children then that also creates a PET, but if they continue to live there it is a 'gift with reservation' and the seven years taper does not start until they vacate which could have horrendous IHT consequences. Also bear in mind that there is no CGT on death, all assets being aggregated and IHT applied. EIS schemes can only be created, in general terms, where investors participate on a new start up company. VCTs are broadly similar to an Investment Trust scheme. I suggest that the administrative costs of either will far exceed any benefit. There you are, a quick canter through the possibilities and pitfalls. Please do not hesitate to follow up if you need more information.
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Customer: replied 1 year ago.
So, with my dad's pension he will get £150k lump sum tax free and remaining £150 to buy annuity or some other product, is the lump sum he takes taxable for iht is he dies before its spent? could the £150k be gifted to siblings to get it out of the estate?
Customer: replied 1 year ago.
sorry, also the total value of the estate is currently then: house £650k, buy to let £350k savings etc £400k less £325 allowance taxable estate therefore say: £1,075k @40% £430k is this correct ( at least the thoery!) how can this be reduced by gifts etc?
Expert:  bigduckontax replied 1 year ago.
Sorry, I omitted that point in error, I thought his pension was in issue. When his pension pot becomes available 25% not 50% will be tax free and the balance used to purchase an annuity. Currently, with low interest rates annuities are not very good news unless he has a guaranteed rate given by his insurance company on creation of the scheme. Remember it was such schemes which drove Equitable Life to the wall! If he is over 55 he can liberate his pension, but again, if he does so, then 25% is tax free and the balance taxed as income at his marginal rate. Any assets existing on death are gathered in and suffer IHT, so if he takes the tax free 25% and has not spent or given it away then what remains will be exposed to IHT. Let us consider his estate. His assets appear to be 650K + 350K + 400K = 1400K. Deduct 325K leaves 1075K exposed to IHT, bill 430K IHT. Gifts at the levels set out in your question will substantially reduce this, but watch out for the seven year taper rule and any gift with reservation. Thank you for your support.

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