Inheritance Tax/ Property Question

Scoobymoo

Hi

Wondering if anyone can provide some advice on a complicated IHT concept?

My husband's parents have a large house with a a few acres of land. They are considering turning the attic into a separate dwelling with access rights through the rest of the house in an attempt to devalue the house to lower IHT and allow the property to remain in the family when they die. It is very important to them that the house is not sold. The attic dwelling will then be 'sold' to my husband and sister at market value. The sister will then live in the dwelling and pay my husband rent for his half which will go directly back to my husband's parents to pay off the 'debt' of buying the dwelling so effectively not costing him anything. The parents will stay in the remainder of the house.

When my husband's parents pass away, he and his sister will inherit the rest of the house which will have been devalued and therefore hopefully no or low IHT. The sister and family will become the main occupiers of the house paying rent to my husband for his half of it.

I'd be really grateful if anyone could give any advice on 1) if this is a valid way of avoiding high IHT 2) if there might be any implactions on our mortage/ finanical situation/ taxes etc of 'owning' the second property 3) the possible pitfalls of the longer term joint asset that is rented by one of the co-owners from the other

Thank you!

CLAPTON

What has the council said about planning permission, building regulations and fire prevention regulation, gas and electricity issues etc.?

Andy_L

Scoobymoo wrote: »

The attic dwelling will then be 'sold' to my husband and sister at market value. The sister will then live in the dwelling and pay my husband rent for his half which will go directly back to my husband's parents to pay off the 'debt' of buying the dwelling so effectively not costing him anything. The parents will stay in the remainder of the house.

When my husband's parents pass away, he and his sister will inherit the rest of the house which will have been devalued and therefore hopefully no or low IHT.

As Clapton says planning permission etc will be "interesting". How do the costs of conversion (legal, building work, mortgage, stamp duty etc) compare to the IHT saving

'sold' implies tax evasion which is illegal, it needs to be sold without the quotes :-)

Your parents estate, whilst decreasing in asset value, due to selling off the attic flat, will increase in cash value by that fair market value so will have exactly the same IHT liability unless they spend the cash before death.

Your husband will have to pay income tax on the rental income plus all the other costs of being a landlord.

If they're that insistent in the house staying in the Family Scoobymoo in perpetuity then a trust may be a better option

Scoobymoo

Thanks for your responses.

In terms of building, they are working on the renovations themselves. I'm not sure what the costs might be in terms of legals and building regs for that?

The estate as it stands is valued in excess of £1m. I think the idea is that if the estate becomes a house with a separate dwelling, the dwelling would be worth say £120k and the house only then worth say £500k because it has a flat with access rights attached to it so making a total of £620k instead of £1m and therefore less IHT. Does that make sense and sound plausible?!

What I guess I mean by 'sold' is that no money will exchange hands in terms of the initial sale. The parents will effectively sign the property over to my husband and sister who will then owe them the market price of e.g. £120k. The sister will then be repaying half of the mortgage directly and paying rent for the other half of the property to my husband who will then pay it directly to the parents.

CLAPTON

To divide the house into two properties they need planning permission and building regulation approval... without these the flat could not legally be sold.

The building regulation will insist on a proper fire wall in the stairs to allow the flat dwellers to escape in the event of fire.

Even if they give the flat away, it will be part of the estate for 7 years.

The Conservatives have promised to increase the IHT allowance to £1m for a single person and £2m for a couple.
Of course they may not be elected over the next seven years.

Also of course, if your husband dies then half the flat becomes yours; similarly if the sister dies half the flat will be her husbands... you / he may wish to sell to the highest bidder.

As your husband won't be living in the flat, if it is sold or even transferrred to anyone he will be liable for CGT.

But really, I don't know whether it will work in avoiding IHT.