• This topic has 13 replies, 12 voices, and was last updated 12 years ago by 5lab.
Viewing 14 posts - 1 through 14 (of 14 total)
  • What issues/problems/obstacles with this idea (dodging inheritance tax content)?
  • webwonkmtber
    Free Member

    My folks are in their late 70s and own their home. They don’t have anything in the way of savings/pensions.

    I have two older brothers.

    I’m wondering if it would be possible/feasible for me to buy my parents house from them and then allow them to keep living in the house rent-free and enjoy a bit more disposable cash than they have just now.

    I’ve only just had the idea and haven’t gotten as far as speaking to my parents/brothers/lawyers yet – what problems do you foresee with my plan? Is it worth looking into further?

    coffeeking
    Free Member

    I think, and I’m no lawyer, that buying would be fine and dandy. It’s only when they start giving it to you that it becomes an issue.

    However I’m not sure how families take a joint purchase of something worth quite a bit, different ideas of when to sell, how much for etc etc.

    TandemJeremy
    Free Member

    If yo buy it at full value it will make little difference to inheritance tax or to the assessment of wealth made when an elderly person requires care. Do it at less than market value you are getting into some murkey waters indeed. It can be done tho and is a method used to free up money

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    D0NK
    Full Member

    depends how well you get on with your siblings. Buying beforehand with parents mediating is probably preferable to the race to the solicitors once they die – seen some pretty shoddy behaviour by my extended family (in-law).

    oldnpastit
    Full Member

    Everyone has an inheritance allowance anyway of £325k. And if your parents are married or in a civil partnership they effectively get double that:

    http://www.hmrc.gov.uk/inheritancetax/intro/basics.htm

    If their house is worth more than that then they can afford a proper accountant!

    webwonkmtber
    Free Member

    Interesting – sounds like it might be worth pursuing a little further then and getting some proper advice. Thanks all 🙂

    TheGingerOne
    Full Member

    I think your issue will be with them living in it rent free. Can’t remember the ins and outs of it so you should seek proper advice, but I have a feeling it is not as simple as that any more.

    cynic-al
    Free Member

    I’m pretty sure your original idea would be caught as a taxable benefit in kind or something.

    Def speak to a lawyer/accountant/expert.

    ourmaninthenorth
    Full Member

    BigDummy – if he frequented this place any more – would be the man to ask.

    Largely, as I recall, your not charging them rent is going to be the problem.

    You also need to consider the rules on potentially exempt transfers, and the impact that will have on IHT – there may be some bearing here if the transfer isn’t done at market value (above or below).

    rkk01
    Free Member

    your issue will be with them living in it rent free.

    Yes, this…

    It is incredibly complex, with many (unexpected) pitfalls.

    My mother and aunt got caught with this. My grandfather died in the 80s, and left his house to his two daughters – but with provision for his widow (2nd wife, therefore unrelated to rest of family) to live in the house rent free for the rest of her life.

    When she died, my mother / aunt had to pay inheritance tax on HER estate, even though they weren’t inheriting anything from her. My grandfather’s property was less than the IHT threshold, both when he died, and when his widow died. But because she came from a farming family her personal estate was worth more than the threshold, and because she had lived there rent free (ie a benefit) my folks had to pay 40% of the house value before they could take ownership.

    It is a very, very unfair method of taxation 👿

    mefty
    Free Member

    If you rent to a connected person, such as your mother, then a market rate of rent will be assumed by the tax authorities whatever rent is actually paid so you will be required to be pay tax at your marginal rate on this deemed income. This is an income tax problem.

    rkk01’s situation is different where there is a gift subject to a reservation of benefit the gift is not recognised for inheritance tax purposes. The benefit was the ability to continue living there rent free. This is an inheritance tax issue. (EDIT: On rereading, rkk01’s grandfather created a life interest trust so the 2nd wife was deemed to own the property for inheritance tax purposes.)

    Get some professional advice but before doing that make sure you have identified what you all want to achieve.

    NJA
    Full Member

    First of all, what happens to the cash, you buy the house it has to be at full market value or you fall foul of the Gift with Reservation of benefit rules. So they swap one asset (property) for another of the same value (cash) – No IHT saving there.

    Secondly if they continue to live in the property they will need to pay a full market rent to you (their landlord) otherwise they will fall foul of the rules around previously owned assets and taxation.

    If they pay you a full market rent it is income for you and therefore subject to income tax. You were previously paying tax on your cash interest and will now be paying it on rental income which is likely to be higher and so more tax. It also makes your tax returns each year a bit more complicated.

    If your parents are living in the property rent free and one or both of them needs care then the local authority could potentially set aside the property transfer as a deliberate deprivation of assets (especially if you have done the investment planning for the cash properly and put it out of their reach for the purposes of the means test).

    By owning your parents house you open yourself up to a potential bill for capital gains tax if you sell it when they die. The value for CGT purposes is fixed at the date of the transfer and tax is calculated at the date of sale. This does not happen when you sell your own propert as you get Principal Private Residence relief, nor does it happen with an inheritance beacause you get an automatic uplift for CGT at that point.

    If you or one of the co-owners get divorced, go bankrupt or the like then the asset is yours and you could potentially leave your parents homeless if the sale of their property is forced to pay your/ their debts/ divorce settlement. This will not make you popular with mum and dad. I have had experience where this is happened and the divorced son ended up living with his dad in rented accommodation!

    As was said earlier the Inheritance Tax threshold for a married couple is effectively £650k in any case – if you are over that you need to seek professional advice.

    Its a complex area and needs more consideration than a thread on a forum. If you want to talk to someone about this then my advice would be to find a member of the Society of Trust and Estate Practitioners who will have the correct specialist knowledge in this area of planning. If you are in the Lincolnshire/ Cambridgeshire region feel free to drop me a line.

    Regards
    Nick.

    webwonkmtber
    Free Member

    Thanks everyone – some really solid advice there. Next step is clearly a heart-to-heart with the family and the lawyers. Overall though it sounds like it’s not necessarily the simple and winning idea I thought it might have been…

    5lab
    Full Member

    you can get a mortgauge on a property for exactly these purposes (ie your parents can) – then when the property is passed down and you\your siblings sell it, they get however much money (plus interest) was lent

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