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Email your tax questions to Mike via email: taxhacks@telegraph.co.uk
Dear Mike,
I am 81, divorced, fit, active and healthy. I have three impoverished children, two in their 30s and one in their 20s and wish to leave my assets equally between them.
My annual income is the state pension and self-invested personal pension in drawdown paying between £25-30,000 a year. My assets are a house worth £325,000, a Sipp worth £525,000 and £150,000 in other assets.
What should I do to pass on the greatest benefit?
Charles
Dear Charles,
You may not expect me to say this but I feel obliged to start by questioning your basic premise. Do you really want to make gifts at this stage in your life?
Whatever the life expectancy tables say, as a fit, active and healthy 81-year-old you may well have many years ahead of you. I am a member of our local probus club where last week we welcomed a fit and healthy new member, aged 99!
Despite your well intentioned motives to help your children, your first duty is to yourself. In addition, remember that costs often rise in later life. What I can say is that there is no tax reason to make gifts now. As matters stand your estate at death would be about £475,000, which is below the combined inheritance tax nil-rate band of £325,000 and £175,000 residence nil-rate band. Your Sipp will not form part of your estate at death.
If you are keen to help your children you can probably afford to make relatively modest gifts of a few thousand pounds each but I suggest that you limit it to that.
Without wanting to sound harsh, unless there are medical reasons to prevent them working I would have thought that at their ages they should be making their own way in the world and not relying on their father financially.
Nevertheless, the two practical steps you should take if you have not done so already are: to make sure that your will is up to date and to ensure that the trustees of your Sipp have instructions to pass on the benefits to your three children equally after your death.
Dear Mike,
My widowed mother aged 96 is in a care home and owns a flat which she will not return to. Would it be wise to sell the flat now or after she passes away?
The value of the flat and her savings are over the threshold of £325,000. My sister and I are direct descendants and wonder if there will be tax to pay on our mother’s home?
Elizabeth
Dear Elizabeth,
This is a concern for many people these days but you have more flexibility than you may think. The two taxes that people worry about are capital gains tax and inheritance tax.
As you will know, there is no CGT when you sell your property if it has always been your main home, referred to as principal private residence (PPR) relief.
This relief is usually restricted to the period that it was your main home plus the final nine months of ownership. However, this final period is extended to three years in your mother’s case because she moved into a care home.
I am not sure when she moved in but even if this was more than three years ago there may be no CGT if she sold the flat now. This is because the capital gain is worked out on a time apportionment basis. For example, suppose she had lived in the flat for twenty one years and moved to the care home four years ago.
If she were to sell the flat now at a gain of (say) £100,000, after PPR relief only £4,000 would be liable, and that is less than the current £6,000 annual CGT exemption. Incidentally, this exemption will fall to £3,000 from next April. There is no CGT at death but in your mother’s circumstances you may not need to wait to sell the flat, especially if the money would be useful for care home fees.
You have not told me the overall value of her flat and savings but I suspect that IHT will also not be a problem. This is because of the way the IHT nil-rate band can be extended to £500,000, as I explained here.
Even if your mother sells her flat she can still qualify for the residence nil-rate band (sometimes called the family home allowance) of up to £175,000 through claiming downsizing relief.
If your parents were married at the time your father died and he left his assets to your mother then the relief could be further extended, potentially up to a million pounds. This extra relief would need to be claimed by your mother’s executors in due course. It may well be wise for her to sell the flat now if she can obtain a good price.
‘I’m 81, with £1m in assets. What’s the best way to help my impoverished children?’
Tax Hacks: costs often rise later in life – so be wary of making gifts too early