On National Siblings Day, we’re diving into a common family scenario: figuring out inheritance and care arrangements when a family member builds an annexe. To guide us, we’ve enlisted Paul Robertson, a chartered financial advisor from Lyonhurst Wealth.
In this blog, Paul will walk us through a real-life case study of two siblings (whose names have been changed) facing inheritance challenges when their father decided to build an annexe. Let’s explore how they tackled this issue together and the solutions Paul gave them.
Scenario
The family are Dave and Angela, a brother-sister duo aged 62 and 60. Angela lives in rural Lincolnshire, close to their elderly father’s home, while Dave lives in Essex with his wife. Angela, recently widowed, is a mother to two daughters and a grandmother. Despite living comfortably, Angela’s savings are modest. She relies on her late husband’s pension and rental income from two properties, valued at £370,000 combined, alongside her main residence worth approximately £500,000.
On the other hand, Dave and his wife have no children. They own a property valued at £850,000, with substantial pension arrangements and a total of £600,000 in savings and investments.
Their father, aged 86, owns a property worth £350,000 and requires daily assistance with mobility and personal care, despite maintaining mental capacity. Angela and her daughters are considering selling their father’s house to finance the construction of an annexe on Angela’s property. This decision prompts a series of important considerations for both siblings.
Inheritances
Regarding inheritances, Dave is facing a pressing concern. He worries that most of the sale proceeds from their father’s house will be directed towards building the annexe on Angela’s property. This investment primarily benefits Angela’s estate, leaving Dave uncertain about his share of their father’s estate. Despite their father’s pensions covering his current income and care needs, Dave fears he will receive nothing from his father’s estate once those pensions cease upon his passing.
Inheritance Tax (IHT)
There is currently no Inheritance Tax liability concerning their father’s estate. However, adding the annexe to Angela’s property might impact her IHT position. This is because it will increase the overall value of her estate, potentially making part of it taxable over time.
Care Fees
In terms of care fees, their father currently receives daily assistance covered by his pension income. However, if his care needs escalate to full-time care, the Local Authority may impose a charge against the property to cover these costs. This could gradually erode the estate’s value, potentially leaving both siblings with diminished inheritance prospects.
It’s crucial to note that disposing of assets to avoid care fees can be seen as ‘deliberate deprivation’ under The Care Act. However, proving that avoiding care fees was the sole motivation for asset disposal can be challenging for the Local Authority. Given that the primary goal is to provide home care for their father, it’s unlikely that building the annexe would be considered deliberate deprivation.
Death (of sibling)
In the event of a sibling’s death, we must consider the implications of Angela predeceasing Dave. In such a scenario, Angela’s property would pass to her daughters, potentially including the value of their father’s property.
Re-marriage
Another concern raised by Dave is the possibility of Angela remarrying, which could result in her new spouse benefiting from their father’s estate. This adds another layer of complexity to the inheritance and estate planning considerations for both siblings.
Solution
The proposed solution entails funding the construction of the annexe, estimated to cost around £170,000, through a bridging loan. This approach enables their father to remain in the property during the construction period, which is estimated to increase Angela’s property value by approximately £100,000 to £120,000.
Once completed, the property will be sold, and the loan will be repaid. With the property expected to sell for £350,000 and associated fees and loan interest amounting to around £10,000, the net proceeds would total approximately £340,000. Out of this amount, £170,000 would be allocated towards the construction of the annexe.
Inheritance Distribution
A new Will would be drafted to allocate 80% of the estate to Dave, reflecting the substantial investment in Angela’s property. Lasting Powers of Attorney (LPAs) would also be established for both siblings, ensuring legal protection and decision-making authority.
Furthermore, for Angela, additional measures such as a new Will, severance of title, and Property Protection Trust would address her Inheritance Tax (IHT) concerns. Upon death, Dave would receive 80% of the remaining £170,000, totalling £136,000, while Angela would receive the remaining 20%, equating to £34,000.
Angela’s Taxable Estate
Angela will gift one of her rental properties to her daughters. This will reduce her taxable estate below the IHT threshold, with her father’s contribution to bills replacing the income. A gift inter vivos policy is put in place to cover the gift, which is treated as a potentially exempt transfer.
In summary, Dave would receive £136,000, and Angela would receive between £134,000 and £154,000, depending on the added value of the annexe. Both siblings view this distribution as equitable, considering Angela’s caregiving role.
This comprehensive strategy offers partial mitigation against potential future care costs. It also facilitates the immediate construction of the annexe, benefiting their father’s comfort and well-being. Importantly, it ensures that the eventual distribution of the estate aligns with both siblings’ agreement of equity, while also maintaining some liquid capital for their father’s potential future needs.
If you’d like to discuss the above case study or your personal annexe inheritance tax worries, please contact us here.
About Lyonhurst Wealth
At Lyonhurst Wealth we provide expert advice and guidance to both private and corporate clients, helping them maintain financial health and ensuring they are on course to meet their financial objectives.
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We work from the whole market to source the most appropriate products and investments that are most suited to you and your financial needs.
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We do not believe in a ‘one size fits all’ approach. Each client’s needs and objectives are considered on an individual basis, and we provide a bespoke investment solution for every client.
Experience & expertise
Members of our Advice Team and our Technical Support staff are qualified to an advanced level and have significant experience in the financial services industry. We have detailed knowledge of all aspects of financial planning, including more bespoke areas such as corporate financial planning and working with sports professionals.
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We work with trusted business specialists – such as legal and estate planning professionals, accountants, and M&A consultants – so that together we can achieve the specific and individual aims of our clients.
Paul Robertson, Adv. DipFA, CeMAP Diploma, CeRER, ALIBF
Chartered Financial Adviser, Lyonhurst Wealth, Sheffield.
