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Transcript part 2 of 3
Fiona Julian: Before we had that break, I was saying that some people give assets away in their own planning before they die, so that they wouldn’t have to pay inheritance tax, or so they think.
Gordon Tate: Yeah sure, I mean, the most common one is that parents want to give their big house away to their children, but they carry on living there because obviously, they have got nowhere else to live.
Fiona Julian: What the parents carry on living there?
Gordon Tate: Yes, so they sign it over, they gift it over to the children, but they carry on living in the house, because they don’t have anywhere else to live, and it doesn’t occur to them to move into something smaller. The problem with this is, the government call this a “Gift with reservation”, which means that when the parents eventually die the tax man says well, “as far as we’re concerned, they never gave it away at all, because they carried on living there”, so it still forms part of the estate, it still gets taken into the calculations, but not only that, when the children eventually sell it, they get hit for capital gains tax, so they get a double whammy if you try that one.
Fiona Julian: Right, again, seek advice from the professionals.
Gordon Tate: Yes, exactly, I mean any solicitor worth his or her salt, would advise them immediately not to take that route, if they used a solicitor to effect the legal transfer.
Fiona Julian: What happens though, say, if they give the property and then let their children live in it?
Gordon Tate: If they move out themselves, let the children live in it, there is no problem. It forms part of the normal 7 year rule, in other words, if it is worth more than the Nil Rate Band; the £300,000, this year, provided they lived for 7 years, then it is outside of the estate, there is no more problem. If they want to carry on living there, then they have to pay an equitable rent to the children, which means that the children would have to prove that their parents paid them the “going rent” for a property of that size and scale, and that they didn’t, in any way, reimburse it back to the parents, afterwards.
Fiona Julian: Right, ok, there are so many things to think about, which as an individual you wouldn’t consider.
Gordon Tate: That’s right, yes; I mean there are so many little rules and regulations with regard to inheritance tax. Another one, for instance is, if you leave the gifts between husband and wife are totally tax free; but if you don’t leave a will, you haven’t made a gift, therefore, the surviving spouse doesn’t get the whole of your estate, tax free.
Fiona Julian: Right.
Gordon Tate: What then basically happens is, if there are children the surviving spouse would receive the Nil Rate band, they would get £125,000 totally tax free, then the balance of the estate is split into two; half of it would go into a trust for the spouse and they would receive an income from the trust until they died, then it would be encashed, added to the estate, taxed and then go to the children. The other half would then go into the children until the children are 18, then when they are 18, they would receive it, but until then they would just receive an income; whereas, if you make a will everything goes to the surviving spouse tax free.
Fiona Julian: So where there’s a will, there’s a way!
Is that where the phrase came from?
Gordon Tate: Possibly, possibly. I’ve met many, many people who take the view that they are tempting fate if they make a will, and therefore, they refuse to make a will, and the tax man loves people like that.
Fiona Julian: Well I was thinking while you have been talking, you know, we have issues actually, setting up pensions, anything that deals with the fact that we will die, basically, we don’t like to talk about, we don’t like to talk about it, but we …
Gordon Tate: That’s right, but again, you mentioned pensions; most pensions are set up under a thing called a discretionary trust, which means that on death the trustees will pay out the benefit to the beneficiary of their choice, however, because it has been set up under a discretionary trust, it can be paid tax free. Therefore, what we often advise clients to do, especially if they are married, is to set up another discretionary trust and inform the pension trustee that they would like the death benefits to go into the discretionary trust, known as a Spousal By-pass Trust, and what this effectively does, is removes that money from the estate on death, so that when the second of the couple dies, that money goes straight to the children tax free also, so that then removes any pension benefits from the surviving spouses estate. I got a bit technical there haven’t I?
Fiona Julian: Gosh, yes. I am writing all these things down, I don’t know…
Gordon Tate: What basically happens; you’ve got a married couple, the husband has a pension, he dies, the money is paid to the wife tax free, ok, no problem, but then if the wife dies shortly afterwards that money is sitting there in her bank and then forms part of her estate, and is taxable. By using the Spousal By-pass Trust, which most good solicitors would be able to set up, in essence, the money doesn’t form part of the wife’s estate, but she still has access to use it while she is alive, when she dies, it then goes to the beneficiaries i.e., probably the children.
Fiona Julian: Right, but it has all been thought through, whichever path happens, you’ve got a plan in place.
Gordon Tate: Oh absolutely, I mean, I recently did a plan for a company director in south London, and before we designed the plan, his inheritance tax liability if he and his wife had died, would have been £435,000, and we have reduced it to nil, simply by advising on certain types of trust, and he went to see a solicitor and had all the trusts set up.
Fiona Julian: Superb.
Gordon Tate: One thing I will say, I don’t write trusts, and I don’t write wills, I design the strategies, they then go and see their solicitor, he or she are the ones who write the wills and the trusts.
Fiona Julian: I see, I see. Just again, talking obviously of wills, these all happen when people die, I was thinking, in the Bournemouth area, probably across the south, that we have got lots and lots of older people living longer and longer, so long-term care and residential care fees are another area I think that you can give advice on.
Gordon Tate: Yes, absolutely, I mean, in this day and age a residential home would cost in the region of about £30,000 a year and average nursing home would cost in the region of £40 to £50,000 a year. If you sell a house for £300,000 and you’ve got a husband and wife in a nursing home, at say £50,000 a year each; three years, it is gone! Therefore, there is nothing left for the family to inherit. What we can do is design, what I call, “a damage limitation strategy”, which means we can limit the cost of the care to a one off payment, which might be say £50,000, it might be £100,000, but then the rest of the estate is protected and ring-fenced, it can then be invested so that when the elderly couple die, eventually, their family have got something to inherit. Alternatively, because medical science is making people live longer and longer and longer, and I know this, I have got an 88 year old father, who’s currently in hospital, due home any day now, they are able to cure more and more illnesses, but it still leaves the elderly people vulnerable, it leaves them not able to look after themselves and the older they get the worse the position gets and eventually they do go into nursing homes, and at £40 to £50,000 per year, that makes a big hole in the average estate.
Fiona Julian: Yes it would do, and if you have to sell your property to pay for that as well, how quickly would your property sell, there are so many issues.
Gordon Tate: Oh there are, I mean I had some clients at the moment who have been trying to sell their property for over a year, and they have been paying out, something in the order of £3,500 per month for the care fees, while they are waiting for the property to sell. In fact, what actually happened was, while it was on the market, vandals broke in, stripped all of the copper out, and flooded the place. They have then had to wait for the insurance company to rebuild it and refurbish it; it is now back on the market. They also have to take special care that it doesn’t happen again, before they can get it sold.
Fiona Julian: So this area of care fees and how to manage money is another area that you are able to advise on Gordon?
Gordon Tate: Absolutely, yes.