Tax implications for buying house for parents

M271

My father in law has suddenly been taken ill and needs to move and live in a bungalow, my mother in law still lives with him. They are both in their mid 70's.

They will put their house on the market but this could take some time to sell.

If my wife (their daughter) and I buy quickly, with mortgage, the bungalow in our names and then her parents pay us back (pay off the motgage) when their house sells but the bungalow stays in our name, what are the tax implications when were to sell the bungalow in the future ? (probably after they have died or gone into a home).

fengirl_2

You would be liable to CGT on the difference between the sale price and the cost price (less expenses). Mortgages have no tax implications.

insured

You can avoid CGT on the sale of the bungalow if you purchase the bungalow via a trust. The PPR exemption extends to a property in a trust if the trustees allow any beneficiary of the trust to occupy it as their main residence.
It will also fall outside of their estate for both IHT and means tested benefits.
You must weigh up the potential CGT savings against the cost of setting up the trust however. You could probably get a solicitor to set up the trust for about £500. It is straightforward to adminster the trust yourself as their will be no income from the assets in the trust. At the present moment, bearing in mind the state of the housing market, it is uncertain whether there will be any gains to speak of on the eventual sale of the bungalow.

bryanb

Remember the sale of house proceeds could be demanded by LA if Parents in law need local authority funding for care home fees.

localhero

I think it would be a lot simpler if they kept the property in their names, but consulted a professional to write their Wills to legitimately safeguard their home and other assets from means testing if either required long term care - particularly the survivor of them.

Putting property into the names of others or into trust will inevitably raise questions about their motivations for doing so, and could be disregarded if long term care is required at a later stage.

There's also the issue of their security if you had financial or marital problems.

As Fengirl says CGT will come into play, and for IHT this will be broadly neutral as they have made a gift with a reservation of benefit - and so unless they pay you a market rent will be added back into their estate for IHT purposes.

M271

insured wrote: »

You can avoid CGT on the sale of the bungalow if you purchase the bungalow via a trust. The PPR exemption extends to a property in a trust if the trustees allow any beneficiary of the trust to occupy it as their main residence.
It will also fall outside of their estate for both IHT and means tested benefits.
You must weigh up the potential CGT savings against the cost of setting up the trust however. You could probably get a solicitor to set up the trust for about £500. It is straightforward to adminster the trust yourself as their will be no income from the assets in the trust. At the present moment, bearing in mind the state of the housing market, it is uncertain whether there will be any gains to speak of on the eventual sale of the bungalow.

Thank you for your advice.

What happens to the proceeds of selling the property when its set up in the trust that you describe ?

M271

localhero wrote: »

I think it would be a lot simpler if they kept the property in their names, but consulted a professional to write their Wills to legitimately safeguard their home and other assets from means testing if either required long term care - particularly the survivor of them.

Putting property into the names of others or into trust will inevitably raise questions about their motivations for doing so, and could be disregarded if long term care is required at a later stage.

There's also the issue of their security if you had financial or marital problems.

As Fengirl says CGT will come into play, and for IHT this will be broadly neutral as they have made a gift with a reservation of benefit - and so unless they pay you a market rent will be added back into their estate for IHT purposes.

Taking your point about the wills side of things, can the parents put in there wills when they die to give their 50% share of the house ownership not to their spouse but to their daughter (my wife), this would then lessen the amount that the local authority could claim for long term care for the surviving partner.

localhero

M271 wrote:

Taking your point about the wills side of things, can the parents put in there wills when they die to give their 50% share of the house ownership not to their spouse but to their daughter (my wife), this would then lessen the amount that the local authority could claim for long term care for the surviving partner.

Yes that's right. And also to protect the interests of the surviving spouse they can be given a right to remain in the property. This would then avoid CGT and be IHT friendly as well.

If the surviving spouse did require long term care, there is also the argument that their share in the house is effectively nil when they are means tested.

It is perhaps worth adding that if both parents require care, this scheme wouldn't work, and if one parent required care whilst the other was still living in the property, then the property must be disregarded from the means test.

It is most effective in the common situation where one parent has died and the survivor is receiving or later requires long term care. Obviously if the house passes to them, then that asset can be utilised to pay for those fees.

insured

M271 wrote: »

Thank you for your advice.

What happens to the proceeds of selling the property when its set up in the trust that you describe ?

It all depends on the terms of the trust. Whatever you like really.
You can wind up the trust. Your inlaws can purchase the property from the trust. You and your wife could even benefit from the trust. However, if either you or your wife are allowed to benefit from the trust, any gains will be assessed on you. You will still be able to benefit from the PPR extention.
I would advise you to go to a solicitor about this. Not a high street solicitor, but one who has a large private client department and who will therefore have someone who is STEP qualified.
They need not be more expensive than a high street solicitor as they will have STEP approved precedents for this, as it is fairly commonplace. This will keep the cost down.
STEP always recommend that anyone purchasing property for another to live in do not put the property in that persons name, but recommend a trust. The local authority cannot touch it if your in laws need care as it has never been theirs in the first place.
As I said you need to balance the cost of the trust against any CGT savings you may make. Both you and your wife have an annual expemption of nearly £10k each, so you would have to gain more than £20k to make the cost worthwhile.
Their own home is a different matter however.
You really should take proper professional advice from STEP and explain your objectives.

localhero

insured wrote:

The local authority cannot touch it if your in laws need care as it has never been theirs in the first place.

The way I understand it is that if the house is sold off to redeem the mortgage that the daughter and son in law temporarily took out, the value of their estate will be reduced accordingly.

If there was no IHT planning or other good reason for the transaction and care is required, I think the local authority would have strong grounds to claim that there had been a deliberate deprivation of assets.

There is a simpler, cheaper and more effective solution, non?

JohnnieW

M271, you have three possible ways to structure this transaction.

1. Keep bungalow in your own and wifes name.
Advantages: you retain control. Costs minimal. Bungalow not assessable on inlaws, for means tested benefits or home fees.
Disadvantages: CGT problem when you sell. Possible problem for inlaws if you or wife predecease in laws, or split up.

2. Put bungalow in trust. Inlaws purchase bungalow from trust when existing house sold.
Advantages: Control retained. No problem if you predecease or split up. No CGT problem. No assessment on inlaws for means tested benefits or home fees. You retain control.
Disadvantages: Cost of setting up trust and subsequent purchase of bungalow.

3. You purchase property in inlaws name.
Advantages: No CGT problem.

Disadvantages. Assessable for means tested benefits and home fees. Loss of control for you. Could be willed to another family member.

There are many things to consider here including: Health of both inlaws. Other family members to consider. How long it will take the house to sell.

As insured mentioned, you need to consult a solicitor who will explain all of these options for you. I would go even further than insured when he says consult a STEP member. I would see 2 or 3. Unlikely you will be charged for the initial meeting, and you need to get along and be comfortable with the solicitor. Just because they are suitably qualified does not mean you will get along with them.

What you are doing should not be done lightly and should be carefully thought out and considered as there are many things that could go wrong. You need to be well aware of the implications of whichever route you choose.

It is likely that you will be advised to follow the trust route. As insured said, the house could be repurchased by your inlaws once their own house is sold. It is not just the CGT aspect you should consider when choosing your route, but you should also consider protection for both sides, which is why the trust route would be recommended by a professional.

localhero wrote: »

If there was no IHT planning or other good reason for the transaction and care is required, I think the local authority would have strong grounds to claim that there had been a deliberate deprivation of assets.

There is a simpler, cheaper and more effective solution, non?

If you read the post insured was suggesting inlaws purchase property back from the trust when their own property is sold.

Simpler - yes. Cheaper - yes. More effective - definitely not.

Simple and cheap just will not do here.