Hi
My father recently passed away and my mother is struggling to cope with the size of her property. However, if she downsizes, what is the situation with regard to inheritance tax? Her current property would be valued at approximately £350k which would equal her IHT property allowance when combined with my father’s, but the new property may be over £100k less. Is there a way she could still benefit from the full £350k allowance, otherwise she risks falling into the grasps of IHT with regard to the rest of her estate, having too much cash after liquidating some property value.
Another consideration is that she was either going to complete a deed of variation to redirect the non-joint part of my father’s estate (the residual estate) to myself and my sister, or take the estate herself as named beneficiary and then gift us the equivalent (to potentially benefit from reducing IHT due to taper relief if applicable, although she is 80 years old). However, she may now need to use those funds in the short term to fund a cash purchase of a new property. Even though a deed of variation has 2 years to be completed, and I believe can still be used even after finds have already been distributed, if my mother used the funds to purchase property, and replaced them once her old property was sold, would a deed of variation still be effective in passing the funds to myself and my sister as if from my father’s estate, despite having being claimed and used temporarily by my mother?
Many thanks
A really interesting question for which thank you. This discussion forum isnt intended to be taken as legal asdvice, but hopefully the following points around the subject matter may help! And, if you would like to talk to one of our estate planning lawyers – you can always do so!
So, you have quite rightly highlighted some key areas:
1) Transferrable nil rate band
2) Residence nil rate band
3) Deeds of variation; and
4) Lifetime gifting and the Taper Relief that goes with that.
How they apply to the combined estates will of course be down to
1 & 2 – nil rate bands
These are what they are and it is simply a case of applying the relevant rules/thresholds. All estates will attract a nil rate band currently £325k, and a further £175 residence nil rate band can apply too where property is passing to direct descendants. This creates an effective total nil rate of £1mil. If the nil rate bands go unused on first death (of a married couple), then they can be used on the death of the survivor – hence the £1mil total. However, the nil rate bands MUST be
- unused
3) Yes, the general rule for deeds of variation is indeed 2 years. The obvious snag that appears however is that if the variation diverts gifts away from spouse (who is an exempt beneficiary by virtue of the spouse exemption) to a chargeable beneficiary, it then ‘uses’ up some or all of the nil rate band(s) removing them from the potential to be used on second death.
4) And, that is where lifetime gifting becomes an option (it is for your mother to decide of course on whether it is the correct option for her!). As you rightly say, a gift made by your mother would set the 7 year rule ‘ticking’ during which Taper Relief potentially applies. If the person making such a gift survives 7 years then that gift falls out of the estate. And, if the nil rate band on first death remained in tact (unused), that can also be claimed (on current rules) too.
If you have not already seen them, you may find the following blogs helpful:
Lifetime Gifting
Gifts with Reservation of Benefit
Deeds of Variation
Thank you again for reaching out. This forum is not intended to be legal advice, but if you do need help, thats where our expert solicitors come in! So, please don’t hesitate to make contact if you would like advice.
Thanks so much for your further question! Deeds of variation are very often entered into after the ‘initial beneficiary’ has received funds from the estate.
Thank you for your reply. Just a query on the deed of variation issue if I may… I understand that it would permanently reduce the IHT allowance available to pass from my father to my mother if a deed of variation was to be used instead of my mother gifting the funds from her receipt of the residuary estate. However, my primary concern is whether a deed of variation can still be applied to my father’s estate if my mother has in the interim accepted the funds as beneficiary and used them temporarily to part fund a property purchase. If she thereafter replaced the funds by selling her original property (quicker and easier to move into new property before preparing original one for sale), would a deed of transfer still be effective so that her subsequent transfer of the value of my father’s residual estate to myself and my sister would be successfully treated as if we had been originally named as beneficiaries in my father’s will and would not be treated simply as a gift from my mother?
Many thanks for taking the time to respond.
