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MB1972
Posts: 4 Newbie
Hi,
I have an interesting situation which I will try to explain.
My parents in law have been offered a significant amount of money for their property by their next door neighbours above the market value. Their plan is to knock down both properties and build multiple homes on the 2 sites, it is likely this will get planning permission as similar has already been done a number of times in the road. The complication to this is that my father in law would like to buy/own one of the new homes on the plot once his has been removed. He would like at the same time to avoid future inheritance tax and we can assume that one of my parents in law will live more than 7 years so gifting is an option. To further complicate things my wife and her sister were left 25% of the property by their grandmother (original owner) to be realised on sale of the property, so my parents in law only actually own 50% of the property.
After reading extensively about pitfalls such as GWR, POA, and ignoring the obvious issues like where does he live in between ,getting a proper valuation, families falling out and divorce. I have come up with a way to possibly avoid CGT on the sale of the property and also stay within the IHT threshold assuming they live for a further 7 years.
My idea is this.
The existing property is sold for less than the offer, offset by the value of the new property he will take on, but he buys the new property for a nominal amount of £1 so a transaction has taken place. i.e. he is offered 1 million for his property, the new property will have a market value of 400K therefore he sells his current property for 600K and buys the new property for £1. My parents in law would then live in the new property which would be below the 1 million threshold for joint couples due by 2020 and he would leave the new property in his will to my wife and her sister. The 600k he sold the home for would be subject to CGT by my wife and her sister for their share. This is not likely to be much more than the property was worth when it was bequeathed and their grand mother died so hopefully would be minimal. My father in law would then gift the remaining money to my wife and her sister less any money he wants to retain.
He would effectively end up with a new house as his main residence, my wife and sister would receive their money tax free, avoiding a significant CGT payment.
Any thought welcome as this is not a simple topic!
I have an interesting situation which I will try to explain.
My parents in law have been offered a significant amount of money for their property by their next door neighbours above the market value. Their plan is to knock down both properties and build multiple homes on the 2 sites, it is likely this will get planning permission as similar has already been done a number of times in the road. The complication to this is that my father in law would like to buy/own one of the new homes on the plot once his has been removed. He would like at the same time to avoid future inheritance tax and we can assume that one of my parents in law will live more than 7 years so gifting is an option. To further complicate things my wife and her sister were left 25% of the property by their grandmother (original owner) to be realised on sale of the property, so my parents in law only actually own 50% of the property.
After reading extensively about pitfalls such as GWR, POA, and ignoring the obvious issues like where does he live in between ,getting a proper valuation, families falling out and divorce. I have come up with a way to possibly avoid CGT on the sale of the property and also stay within the IHT threshold assuming they live for a further 7 years.
My idea is this.
The existing property is sold for less than the offer, offset by the value of the new property he will take on, but he buys the new property for a nominal amount of £1 so a transaction has taken place. i.e. he is offered 1 million for his property, the new property will have a market value of 400K therefore he sells his current property for 600K and buys the new property for £1. My parents in law would then live in the new property which would be below the 1 million threshold for joint couples due by 2020 and he would leave the new property in his will to my wife and her sister. The 600k he sold the home for would be subject to CGT by my wife and her sister for their share. This is not likely to be much more than the property was worth when it was bequeathed and their grand mother died so hopefully would be minimal. My father in law would then gift the remaining money to my wife and her sister less any money he wants to retain.
He would effectively end up with a new house as his main residence, my wife and sister would receive their money tax free, avoiding a significant CGT payment.
Any thought welcome as this is not a simple topic!
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Comments
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What makes you think he and his neighbour would want to get involved in a complex tax fraud?0
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Keep_pedalling wrote: »What makes you think your wife and her sister would want to get involved in a complex tax fraud?0
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A plan so cunning you can stick a tail on it and call it a weasel!0
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Also you should note that HMRC can link transactions if they think a transaction had been set up artificially for the sole purpose to avoid tax.
So I highly doubt they will let the £1 house thing go, as you are avoiding stamp duty there as well. If it's clear to a layman what you are doing to avoid tax, you can get that HMRC gets it too.0 -
In all seriousness my advice to your in laws would be to seek tax and estate planning advice from a professional tax advisor.0
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To further complicate things my wife and her sister were left 25% of the property by their grandmother (original owner) to be realised on sale of the property, so my parents in law only actually own 50% of the property.
Start here were there any lif interests involved?0 -
Thanks for your reply, and we will of course be taking professional tax planning advice anyway.
My wife's grandmother did indeed set up a life interest trust,
It states my father in law is the life tenant and 50% of the property passes to his wife (my mother in law), My wife and her sister will get 25% of the property each.
I would be interested to know how this affects the sales of the property from a CGT and IHT perspective.0 -
You will still need to check the details but the following is a possibility
check it is a qualifying life interest, did it pass through a will on death or before 2006?
if it is it should be as if the FIL owns the lot so CGT should get the full PRR which solves one issue.
the terms of the trust will need checking on exactly what options are available. are sale/purchases in the terms can funds be distributed or does it need dissolving etc.
any gift from the trust being dissolved becomes a PET subject to the usual issues.
As the house did not come with any nil rate band and on death of FIL the kids get 1/2 that would use up his NRB leaving the MIL with 1/2 the house and oly one and a bit NRB if not all used up.
Getting the kids shares out of the trust and past the 7y might be very beneficial all round.
All with nothing dodgy.
get it looked at as a very high priority if this place is worth £1m0 -
My amateur understanding is that Capital Gains Tax is charged on the consideration received for the property.
This does not have to take the form of cash. It could take the form of other assets.
In your example, in exchange for the property he is selling, your father would receive £600k in cash plus a new property worth £400k. I suspect that the total value for CGT purposes would still be £1 million even though only part of it is being paid in cash. I don't think you are actually saving CGT.
I don't know whether your proposal would save SDLT.
As this is a slightly unusual situation, and as it sounds like a substantial amount of capital gains tax could be payable, I think it would be a good idea to get professional advice. A few hundred quid for a bit of sensible advice from an accountant or a tax adviser would be well worth it given the amounts involved.0 -
steampowered wrote: »My amateur understanding is that Capital Gains Tax is charged on the consideration received for the property. no, it is based on the gain in value,
hence it's called capital Gains tax, and that tax is levied on the disposal of an asset - ie a change in its ownership
This does not have to take the form of cash. It could take the form of other assets. it takes the form of market value, not the cash changing hands in the context of a connected party transaction
In your example, in exchange for the property he is selling, your father would receive £600k in cash plus a new property worth £400k. I suspect that the total value for CGT purposes would still be £1 million even though only part of it is being paid in cash. I don't think you are actually saving CGT.
I don't know whether your proposal would save SDLT. SDLT is the tax that is based on consideration, but again in the context of this post entailing exchange of property there are very specific rules over how SDLT would be calculated
As this is a slightly unusual situation, and as it sounds like a substantial amount of capital gains tax could be payable, I think it would be a good idea to get professional advice. A few hundred quid for a bit of sensible advice from an accountant or a tax adviser would be well worth it given the amounts involved.0
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