Deed of Family Arrangement Question

Calltocall

Say a Will leaves a house and Cash to Person A & Person B, Can the house be placed in a trust by carrying out a deed of family arrangement if both a and b are in agreement to do this even if the will didn’t explicitly state that?

Peregrinus

Yes, it can. A and B between them own the entire beneficial interest in the house and so long as they act jointly they can do anything they like with it.

But why would they want to do this? I'm not seeing any tax advantages - if anything, the opposite. Presumably there is some non-tax consideration driving this proposal.

Calltocall

Peregrinus wrote: »

Yes, it can. A and B between them own the entire beneficial interest in the house and so long as they act jointly they can do anything they like with it.

But why would they want to do this? I'm not seeing any tax advantages - if anything, the opposite. Presumably there is some non-tax consideration driving this proposal.

Thank you for the reply, the logic in this scenario is as follows, Person A & B are sisters, they will inherit their Aunts Estate, the Estate is a house and cash. The will does not explicitly state how estate is to be divided rather bequeath entire estate to both nieces and due to bad health of aunt she will not be able to draft another will.

Person A has been living in Aunts house for a year and wants to reside there permanently and hopes to avail of dwelling house relief, Person B is happy to take money and let sister have the house. The logic to a trust is that at the moment if Person A were to inherit house right now they would be hit with a large tax bill on house therefore if House is entered into a trust by person b for person A and then person A takes ownership in five years time for example they will then be eligible for Dwelling house relief? Does that seem doable?

Peregrinus

Let’s assume the cash is 50% of the estate, and the house is the other 50%.

There’s no difficulty, obviously, about A and B agreeing that A will get the house, and B the cash. That in itself would do nothing to save tax, but it would leave A living in a house which she would own in full, rather than in one in which she is beholden to a part-owner.

There would also be nothing to prevent A, as the person with the entire beneficial interest in the house, from directing the executor to transfer the house not to A herself, but to trustees for A. She could then leave the house in the hands of the trustees until she has lived in it for three full years, before directing them to transfer it to herself.

If she then lives in the house for a further six years, would this save her tax under the dwelling house exemption?

“No”, is the answer, because the dwelling tax exemption only applies to inheritances, and the crucial date for the three-years-before and six-years-after rules is the date of death of the disponer. Tipping the house into a trust and leaving it there doesn’t change the date of death.

Even if you could square matters so that by some legal jiggery-poker A was regarded as inheriting nothing, but instead getting a distribution some years later from a trust (and I doubt that you could do that, and if you could it would raise its own tax complications) it still wouldn’t help, because then she would no longer be inheriting the property, and so the dwelling-house exemption wouldn’t be available.

beauf

Get a loan, mortgage pay the tax buy out the other person.

If they can't do that perhaps the house is unaffordable. Sell it and buy something cheaper.

The way inheritance tax is, is often the case the tax makes it impossible to hold on to. Especially as house values are completely out of proportion to salaries.

Calltocall

Peregrinus wrote: »

Let’s assume the cash is 50% of the estate, and the house is the other 50%.

There’s no difficulty, obviously, about A and B agreeing that A will get the house, and B the cash. That in itself would do nothing to save tax, but it would leave A living in a house which she would own in full, rather than in one in which she is beholden to a part-owner.

There would also be nothing to prevent A, as the person with the entire beneficial interest in the house, from directing the executor to transfer the house not to A herself, but to trustees for A. She could then leave the house in the hands of the trustees until she has lived in it for three full years, before directing them to transfer it to herself.

If she then lives in the house for a further six years, would this save her tax under the dwelling house exemption?

“No”, is the answer, because the dwelling tax exemption only applies to inheritances, and the crucial date for the three-years-before and six-years-after rules is the date of death of the disponer. Tipping the house into a trust and leaving it there doesn’t change the date of death.

Even if you could square matters so that by some legal jiggery-poker A was regarded as inheriting nothing, but instead getting a distribution some years later from a trust (and I doubt that you could do that, and if you could it would raise its own tax complications) it still wouldn’t help, because then she would no longer be inheriting the property, and so the dwelling-house exemption wouldn’t be available.

Thank you very much for your detailed response, so am i right in saying bottom line there’s nothing Person A can do to in terms of restructuring will to avoid hefty tax bill if Aunt passes away before she has lived in the house for three years?

Peregrinus

I think not. But given the sums involved, I wouldn't limit myself to anymous advice on the internet. Definitely worth laying out a few shillings on an accountant or lawyer who might spot something that I have overlooked.

beauf

You can get inheritance insurance, probably too late for that now.

https://www.independent.ie/business/personal-finance/using-life-insurance-to-beat-inheritance-tax-31436725.html