[Closed] Hmm, so, inheritance tax

No idea, but first thought - do you have a valuation at the point of transfer and evidence of work done?

I'd have thought valuation at time of death but I'm guessing (so really not helpful)

I don't know the answer but I wonder how it could be accurately valued retrospectively given it's since been renovated. Unless the previous condition was thoroughly documented.

Valuation at time of gift surely? That is the value of the gift which is what matters, not what happens after.
If they had sold the house, and the child had used that money to buy an identical house, renovated it and then it was worth more at the time of death it would be a non issue.
Likewise no relief if, say, they inherit more from the estate at the time of death but the house has fallen down by then and is worth nothing, it was worth what it was worth at the time of the gift.

My parents gifted my brother and I a cottage in Swaledale. At the time of the gift it was valued by the appropriate registered person (surveyor?) and there was a capital gains tax bill based on it's gain in value whilst they owned it.

I assume this value, at the date of transfer, will be used to work out any gains if we subsequently sell it down the line...

No idea, but first thought – do you have a valuation at the point of transfer and evidence of work done?

That's absolutely something I would get done, a valuation and keep records of all work. Fortunately it's not actually happened yet and all relatives are in good health presently.

For IHT it’s the value at point of transfer.

Will need some evidence of it being a fair value, red book valuation normally used and obtained at the time, particularly if capital gains tax was a consideration at the time.

HMRC have got better at tying up data from land registry.

Depending on the value of the house the failed gift may itself not be liable to tax but will impact the remainder of the estate

I don’t know the answer but I wonder how it could be accurately valued retrospectively

Council tax valuations 🙈 A whole other minefield!
31 years of that unless you are Welsh, then a mere 18

I don’t know the answer but I wonder how it could be accurately valued retrospectively

A decent estate agent will be able to do that as they'll have records of sale prices etc going back. It was an estate agent who did our IHT valuation.

https://www.gov.uk/inheritance-tax/gifts

This seems helpful. It says make a record if the value at the time. That and common sense says the value when it changes hand. So get it evidenced.

But anyone who envolved in this professional will know as its a common question

We are sorting my dads sisters estate. The house has increased in value between death and sale. This is counted as a capital gain not more inheritance

From the woman in the know IHT is due on the value at transfer. If the value has increased and it is not the recipients main residence there will be a Capital Gains Tax liability that can have the renovation cost set against it.

Ampthill +1 based on similar recent experience (so not an actual gift but death of a relative). IHT then capital gains.

You can't necessarily value it accurately, but it can still be valued retrospectively, which may have to be argued over with the authorities. Note that CGT was potentially due on this gift as if it was sold at a fair market value, so I hope you are either confident that no CGT is due (eg it was the owner's primary residence, or worth very little indeed), or have adequate records.

Note also that while this sort of "deprivation of assets" works as an IHT dodge, it doesn't work as a way of evading care costs, should that be an issue.

Did they live in it rent free after gifting it? That will have an impact if so

Note that CGT was potentially due on this gift as if it was sold at a fair market value, so I hope you are either confident that no CGT is due (eg it was the owner’s primary residence, or worth very little indeed), or have adequate records.

Which scenario are you referring to here? The OP or Swadedale?
If The OP then I'm struggling to see what CGT is relevant

Why/how does living rent free impact the situation, asking for a friend!!

It will be taxed as a gift, valued as per the time of the gift. This means you don’t get a chance to use residence nil-rate band in the estate. The provisions in IHT regs are very generous for passing on a house in its entirety to a descendant.

@thegeneralist (and others who may be puzzled):

If you dispose of something like a house that has appreciated in value, then even if you give it away for nothing, you are liable to pay CGT as if you had sold it at a fair market price. This is (inter alia) to avoid the rather obvious loophole of me giving my friend an asset that has appreciated hugely in value, and him giving me the same asset back the next day, thereby laundering the gain.

The usual exemption of it being your primary residence does however apply, that is to say, you can give away your primary residence without incurring any CGT liability.

This CGT liability is in addition to, and entirely unrelated from, any IHT liability arising from the "potentially exempt transfer" of assets. So if you give away, or sell, an asset on which you have made a gain, and then subsequently pop your clogs in less than 7 years, the total tax bill may well be substantially more than if you'd just held on to the asset until death.

@augustuswindsock the original owner living rent free means that HMRC doesn't consider it a legitimate gift for inheritance tax purposes and the property is considered as part of the estate at the time of death.

Why/how does living rent free impact the situation, asking for a friend!!

Because the revenue will likely decide it wasn't gifted after all, it was just someone trying to avoid IHT. The people living it would be expected to pay rent or own it.

I'm no expert, but as I understand it, if you continue to live in the house after gifting it, it's a gift with reservation of benefit and it is therefore liable for IHT. If you gift it and move out, and the recipient doesn't live in it then CGT will apply.

https://www.warnergoodman.co.uk/site/blog/news/can-i-gift-or-transfer-my-property-to-my-children

Aah, cheers, what if ‘my friend’ bought the house, taking out a mortgage and let the parents live in it rent free?
Sorry for the slight hijack bitmuddy?

I would assume that was ok, as long as it was bought at market value. But again, not an expert 🙂

Though CGT would probably if not the "friends" primary residence?

It’s a former council house in a Co. Durham pit village, I doubt very much it’ll be anywhere near the threshold for CGT unfortunately!

No worries about any hijacking, this is all very interesting and good replies.

Would change from the parents primary residence to mine, with parents moving elsewhere. So hopefully not too much of an issue for CGT and no rent.

So sounds like get it valued properly based on condition and document the issues thoroughly to begin with.

I know someone who sold his house to his children and rented it back to live in. Both market prices, double win as the house is out of the estate and the rent payments a deduction from estate monthly.

You have to trust your children though, you are effectively at their mercy. Also, any divorcing children the, soon to be ex, partner will own half your home.

That sounds fine from the tax POV @bitmuddytoday but be aware that you could still lose your home to care home fees. Well, you parents charged as if they owned it. I don’t know what actually happens if they are bankrupt apart from a house that someone else is living in!

@poolman, the house might have been out of the estate but the money it sold for wasn’t!

It’s a former council house in a Co. Durham pit village, I doubt very much it’ll be anywhere near the threshold for CGT unfortunately!

Do bear in mind that you have to make CGT statement within (iirc) 14 days of transfer / sale / benefit. This even when CGT is not liable due to being under threshold. Our solicitor was on us to do it when we sold but to let. HMRC apparently being very strict in applying new reporting rules.

Just reading some internal comms (hate me now) on the result of a project to tackle failure to declare CGT on property disposals. Some big numbers involved, and a more proactive approach being taken.

Might pay for a few nurses etc.

@thecaptain
Was aware of the rest, but not this bit

you give away, or sell, an asset on which you have made a gain, and then subsequently pop your clogs in less than 7 years, the total tax bill may well be substantially more

For some reason I thought I was CGT or IHT, but never both. But I can see that if you did liquidate it, then give it away, then croak then you would indeed be liable for both.

Thanks

So sounds like get it valued properly based on condition and document the issues thoroughly to begin with.

We did this with my folks place.

First thing we did was talk to the Solicitor, and they advised us (all) of the most appropriate approach. And we did get it valued at that point (had a water pipe split the morning the Valuer came round, helped enforce the 'condition' of the property and consequential value).

Aah, cheers, what if ‘my friend’ bought the house, taking out a mortgage and let the parents live in it rent free?
Sorry for the slight hijack bitmuddy?

Its the rent free part which HMRC wont like.
They will treat it as tax evasion (the bad one) and will likely disallow the gift.

Everything needs to be done at "arms length", as if it was being sold/rented from a third party.

So when the property is gifted, get an external valuation (you'll need this for the land registry)
Then 'your friend' would have to rent it back at market rents, either via valuation or the government publish rates by area.

Given house prices have risen by 15
% since last March. Most 2nd houses would liable for CGT unless they were worth less than about 90k now if bought before lockdown. Unless I’m missing something.

Captain, good point 're money staying in estate. I suppose the rent payments diminish this.

1st taper is at end of year 4 then full allowance at year 7.

What's not been said yet that us financial illiterates may not appreciate until we get there is that if ownership is shared between parents, then you have twice the individual allowance before inheritance tax kicks in so £600k [ah so tempting to edit! This - incorrect thanks thegeneralist - number definitely dates me...] Also the 7 years thing is a sliding scale from a lot in year one to not much in year six.

Closer to a million now john

Part of the reason I know this stuff is that we went through it with my father (a) being given a house by his mother, decades ago, with no record of a valuation at that time (I had to argue that out subsequently with HMRC), then (b) giving a share to his wife (my mother) prior to (c) selling it and paying CGT on increase in value since he got it, (d) them both giving some of the proceeds to children as a PET, then (e) dying within 7 years, but as the bulk of his estate went to his wife it turns out there is no IHT due on the bit that went elsewhere. If she dies in the next few years, there will still be a potential IHT liability on her part of the gift to the children, depending how large her estate is and where it goes.

Along the way I have discovered more about personal tax law, inheritance, intestacy and legal rights (in Scotland) than I ever thought there was to learn....

The IHT exempt limit from a married couple who own a house is precisely a million. Shocking how few people know this.

That is, unless your combined estate (together with spouse) is worth more than a million pounds, you children will get this entire windfall, without a penny of tax being taken.

The vast majority of inherited wealth goes to rich people in their 50s and 60s. Yes you read that right, it goes *to* these people, who are not in any sense dependent or needy.

In the UK inheritance tax is basically an optional tax paid by people who don't trust their children.

I live in France and there are taxes on gifts here, so you can't give everything away more than 7 years before you die and pay no tax.

In the UK inheritance tax is basically an optional tax paid by people who don’t trust their children.

I live in France and there are taxes on gifts here, so you can’t give everything away more than 7 years before you die and pay no tax.

This ignores the rules on gifts you still benefit from:

If you give something away but still benefit from it (a ‘gift with reservation’), it will count towards the value of your estate.

Gifts with reservation include:

giving your home to a relative but still living there
giving away a caravan but still using it for free for your holidays
giving away a valuable painting but still displaying it in your house

I live in France and there are taxes on gifts here, so you can’t give everything away more than 7 years before you die and pay no tax.

IIRC they don't have tax free savings (eg ISA) either, here you can squirrel away an unlimited amount in tax free investment vehicle (although there is a cap on what you put in, just not what you take out).

I live in France and there are taxes on gifts here

Christmas must be fun

tax free investment vehicle

An ISA is free of income and capital gains tax. A SIPP is the same, plus if you die before you're 75 it can be also be free from inheritance tax.

An ISA is free of income and capital gains tax. A SIPP is the same, plus if you die before you’re 75 it can be also be free from inheritance tax.

Only 25%* of income from a SIPP is free of income tax, the other 75% is taxed at your marginal rate. Also dividends are taxed IIRC whereas in an ISA dividends are tax free.

* And that's only up to the lifetime allowance. An ISA can grow to £10m and be 100% tax free.

Anyway, main takeaway is there are a lot of tax breaks for the wealthy in the UK....

This ignores the rules on gifts you still benefit from:

I think the point they are making is that you can give away everything down to your last million, without reservation, and then there is no IHT at all (though note there may be CGT, which could be worse, but can often be worked around).

Most people (couples!) would find a million pounds of assets to provide a very comfortable living in their retirement. On top of whatever pension they had built up of course, which is likely to be ample in itself.

If you are leaving the bulk of your estate to your children anyway, there seems little reason not to give it to them early. Again, I'm only talking about the very rich with well over a million in total wealth.