Difficulty understanding inheritance tax implications on gifted house deposits

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  • Keep_pedalling
    Keep_pedalling Posts: 16,368
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    Pincher wrote: »
    It's not difficult, it's IMPOSSIBLE to understand.

    http://justwillsandlegalservices.co.uk/latest-news/the-7-year-rule-inheritance-tax-and-lifetime-gifts/

    The 7 Year Rule and the 14 Year Rule

    One element of the rules around Lifetime Gifts that many people are unaware of is that the seven year clock can be ‘reset’ with every gift (over your annual allowance) given before the seven year period has expired on previous gifts.

    For example, if Mr Smith gave Josie the £400,000 gift in 2010, but then gave a further gift (say £100,000) to Josie’s brother, Jim, in 2012, then the ‘clock’ on Josie’s gift is reset to the point that Jim receives his gift.

    As Jim’s gift was received less than three years before Mr Smith’s death, the tax on Josie’s gift now received no relief under the ‘Taper Relief’ rules.



    http://penguintaxplanning.co.uk/misconception-around-gifts-taper-relief/

    Most people are familiar with this seven year period but have you heard of the fourteen year rule that applies to gifts, if you do not survive the seven years?
    This rule is to discourage serial gifting!as a means of!reducing your estate. Let’s use an example; if you gifted £100,000 in July 2007 and £100,000 again in June 2014 and died before June 2021, the values of both gifts will be entered back in your estate and become subject to IHT.!Why? With the fourteen year rule in place, you have effectively reset the!seven year clock!on the first gift as the initial!seven year period was not complete.




    As far as I'm concerned, the only way to avoid IHT is to cryogenically freeze the person before declared dead, do the gifting, and then store them in California for seven years. After the seven years, thaw and issue the death certificate.

    Not really impossible if, like most people do, simply make potentially exempt gifts (PETs) the 14 year complication only comes in if you use chargeable lifetime transfers.

    https://www.thegazette.co.uk/all-notices/content/100654
  • Pincher
    Pincher Posts: 6,552
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    http://webarchive.nationalarchives.gov.uk/20060213211319/inlandrevenue.gov.uk/leaflets/iht2.pdf


    What is a ‘gift with reservation of benefit’?

    A gift with reservation of benefit is one that is not fully given away so that either • the person getting the gift does so with conditions or restrictions attached, or • the person making the gift keeps back some benefit for themselves.
    Where this happens to gifts made on or after 18 March 1986, we can include the assets as part of your estate but there is no seven year limit as there is for outright gifts.
    A gift may begin as a gift with reservation but some time later the reservation may cease.
    What



    Example

    If you give your house to your child but continue to live there rent free, that would be a gift with reservation. If after two years you start to pay a market rent for living in the house, the reservation ceases when you first pay the rent. The gift then becomes an outright gift at that point and the seven year period runs from the date the reservation ceased.
    Or a gift may start as an outright gift and then become a gift with reservation.


    Example

    If you give your house to your child and continue to live there but pay full market rent, there is no reservation. If over time you stop paying rent or the rent does not increase, so it is no longer market rent, a reservation will occur at the time the rent stops or ceases to be market rent.







    So, they can say I am not getting market rent just because the rent doesn't go up every year! If I increase the rent by £1 a year, they will just say that's not enough. Basically, they can and will deny the potentially exempt status if I don't throw my mother out.
  • bigadaj
    bigadaj Posts: 11,531
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    Pincher wrote: »
    http://webarchive.nationalarchives.gov.uk/20060213211319/inlandrevenue.gov.uk/leaflets/iht2.pdf


    What is a ‘gift with reservation of benefit’?

    A gift with reservation of benefit is one that is not fully given away so that either • the person getting the gift does so with conditions or restrictions attached, or • the person making the gift keeps back some benefit for themselves.
    Where this happens to gifts made on or after 18 March 1986, we can include the assets as part of your estate but there is no seven year limit as there is for outright gifts.
    A gift may begin as a gift with reservation but some time later the reservation may cease.
    What



    Example

    If you give your house to your child but continue to live there rent free, that would be a gift with reservation. If after two years you start to pay a market rent for living in the house, the reservation ceases when you first pay the rent. The gift then becomes an outright gift at that point and the seven year period runs from the date the reservation ceased.
    Or a gift may start as an outright gift and then become a gift with reservation.


    Example

    If you give your house to your child and continue to live there but pay full market rent, there is no reservation. If over time you stop paying rent or the rent does not increase, so it is no longer market rent, a reservation will occur at the time the rent stops or ceases to be market rent.







    So, they can say I am not getting market rent just because the rent doesn't go up every year! If I increase the rent by £1 a year, they will just say that's not enough. Basically, they can and will deny the potentially exempt status if I don't throw my mother out.

    Though showing a modicum of sense or knowledge of playing the system you would presumably be giving your mother some cash, which is then transferred as rent through bank accounts to demonstrate payment is being made.

    The amount circulating each year can then simply increase by inflation.
  • dales1
    dales1 Posts: 230
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    Pay the market rent each year.
    That's all.
  • Keep_pedalling
    Keep_pedalling Posts: 16,368
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    Pincher wrote: »
    http://webarchive.nationalarchives.gov.uk/20060213211319/inlandrevenue.gov.uk/leaflets/iht2.pdf


    What is a ‘gift with reservation of benefit’?

    A gift with reservation of benefit is one that is not fully given away so that either • the person getting the gift does so with conditions or restrictions attached, or • the person making the gift keeps back some benefit for themselves.
    Where this happens to gifts made on or after 18 March 1986, we can include the assets as part of your estate but there is no seven year limit as there is for outright gifts.
    A gift may begin as a gift with reservation but some time later the reservation may cease.
    What



    Example

    If you give your house to your child but continue to live there rent free, that would be a gift with reservation. If after two years you start to pay a market rent for living in the house, the reservation ceases when you first pay the rent. The gift then becomes an outright gift at that point and the seven year period runs from the date the reservation ceased.
    Or a gift may start as an outright gift and then become a gift with reservation.


    Example

    If you give your house to your child and continue to live there but pay full market rent, there is no reservation. If over time you stop paying rent or the rent does not increase, so it is no longer market rent, a reservation will occur at the time the rent stops or ceases to be market rent.





    So, they can say I am not getting market rent just because the rent doesn't go up every year! If I increase the rent by £1 a year, they will just say that's not enough. Basically, they can and will deny the potentially exempt status if I don't throw my mother out.

    And quite rightly too. I would be more worried by the fact that she could be made homeless by things like you pre decreasing her or getting involved in a messy divorce. If your house is your only major asset, it is never a good idea to give it away, and if you do have other assets it is better to gift some of those away as they don't have the issue of retaining beneficial ownership that a home does.
  • Pincher
    Pincher Posts: 6,552
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    I'm just saying, they put so many traps in your way, that it's almost impossible to stay in your own home until you pass away.

    I am using the Rent a Room relief to receive rent, but I only just noticed that "market rent" means more than just that. Not increase it every year could put back the "with reservation" status!

    Common sense? How many people out there know to avoid all this?
  • Keep_pedalling
    Keep_pedalling Posts: 16,368
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    Pincher wrote: »
    I'm just saying, they put so many traps in your way, that it's almost impossible to stay in your own home until you pass away.

    I am using the Rent a Room relief to receive rent, but I only just noticed that "market rent" means more than just that. Not increase it every year could put back the "with reservation" status!

    Common sense? How many people out there know to avoid all this?

    Anyone giving away their home should take independent paid for advice, this after all is one of the biggest financial decisions anyone will ever take.

    From what you are saying you and a parent are living in a home formally owned by them, but they have gifted it to you. They still have use of the whole house not just a room, so the rent you are charging is going to be way below the market rate. This arrangement has also almost certainly had a detrimental effect on the primary residence nil rate band that is coming in on April 6th.

    You might find it worthwhile spending a few hundred on some professional advice.
  • Pincher
    Pincher Posts: 6,552
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    edited 20 March 2017 at 11:02AM
    Anyone giving away their home should take independent paid for advice, this after all is one of the biggest financial decisions anyone will ever take.

    From what you are saying you and a parent are living in a home formally owned by them, but they have gifted it to you. They still have use of the whole house not just a room, so the rent you are charging is going to be way below the market rate. This arrangement has also almost certainly had a detrimental effect on the primary residence nil rate band that is coming in on April 6th.

    You might find it worthwhile spending a few hundred on some professional advice.

    You are assuming my mother is the sole occupier.
    The rent just has to cover her room like a lodger.

    I paid ten thousand pounds in professional fees, for lawyers and accountants, when my father passed away, and they brought in a financial adviser to try to push me into a 10% Buy to Let mortgage. I got a 4.99% BTL instead.

    This fantasy of professionals don't mess up is laughable.
    The minimum effort on the last set of Wills was atrocious, I had to insist on some clauses from the previous Will to be re-instated. She no longer works at the firm.

    Who has been advised properly? That not only do you have to pay rent, you have to keep increasing it as well? I thought I did everything correctly, but there is always some small print they will trip you up with.
  • Keep_pedalling
    Keep_pedalling Posts: 16,368
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    Pincher wrote: »
    You are assuming my mother is the sole occupier.
    The rent just has to cover her room like a lodger.

    I paid ten thousand pounds in professional fees, for lawyers and accountants, when my father passed away, and they brought in a financial adviser to try to push me into a 10% Buy to Let mortgage.

    This fantasy of professionals don't mess up is laughable.
    The minimum effort on the last set of Wills was atrocious, I had to insist on some clauses from the previous Will to be re-instated. She no longer works at the firm.

    I would not go along with that fantacy either, but it sounds like you were dealing with salesmen rather than a pro giving independent financial advice.

    I did rather assume that your mother was not sharing with anyone else, other than possibly yourself, but it seems to me that she has done rather badly out of a tax avoidance scheme that provides her with no benefits, a reduced standard of living and there is a chance that the scheme may backfire and leave you with a bigger rather than smaller tax bill.
  • Keep_pedalling
    Keep_pedalling Posts: 16,368
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    Pincher wrote: »

    Who has been advised properly? That not only do you have to pay rent, you have to keep increasing it as well? I thought I did everything correctly, but there is always some small print they will trip you up with.

    Hardly small print, and any IFA or tax advisor would point that out without fail.

    From what you say your mother does not appear to be very wealthy, would her estate be anywhere near her nil rate band anyway?
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