Should father-in-law give house to kids? Understanding CGT and IHT

carmen_blue

My father in law lives in a flat valued at £300k. It's not in great condition and is too big for him. He owns it outright. He'd like to move somewhere smaller and without stairs, so we're looking for a place for him to rent (not buy) closer to the family. We would then renovate his flat and could potentially sell it for £500k (or rent it out indefinitely). Many questions have come up to keep taxes at a minimum and we're hoping to get some answers here before hiring a tax specialist! Presumably if he gives it to his children (he has two - I'm married to one), then we would have to pay CGT if we sold it. What about taxes if we keep it in his name and sell it? What if we keep it in his name but he dies before selling it (his health is ok at the moment though thankfully)? Presumably we would then have to pay IHT if it has gone above the threshold. We're also keen on doing it up and renting it out. If we do that, would it be better if it were in his children's name, so that when he does pass, we would not have to pay IHT? Thanks and sorry if this is in the wrong forum.

fengirl_2

If the flat is retained by your FIL, then there will be no CGT on sale. If he gives it to the children, they would have to pay CGT on sale on the difference between sale price and value at transer (less improvement costs). The value at transfer would also count towards his IHT allowance if he dies within 7 years.
There is no CGT on death, so if he owns the flat on death, there is no CGT.

SeniorSam

carmen_blue wrote: »

My father in law lives in a flat valued at £300k. It's not in great condition and is too big for him. He owns it outright. He'd like to move somewhere smaller and without stairs, so we're looking for a place for him to rent (not buy) closer to the family. We would then renovate his flat and could potentially sell it for £500k (or rent it out indefinitely). Many questions have come up to keep taxes at a minimum and we're hoping to get some answers here before hiring a tax specialist! Presumably if he gives it to his children (he has two - I'm married to one), then we would have to pay CGT if we sold it. What about taxes if we keep it in his name and sell it? What if we keep it in his name but he dies before selling it (his health is ok at the moment though thankfully)? Presumably we would then have to pay IHT if it has gone above the threshold. We're also keen on doing it up and renting it out. If we do that, would it be better if it were in his children's name, so that when he does pass, we would not have to pay IHT? Thanks and sorry if this is in the wrong forum.

Carmen,

Without full details it is difficult to clarify the position, but if your father in law is a widower and his wife left everything to him, then there will be two nil rate band allowances that can be claimed when he dies, his and his wife's.

Therefore in this tax year if he were to die and the estahe is below £650,000, there would be no IHT, but tax at 40% on anything above..

Presumably he has sufficient icome to meet the rent of a new home, but another alternative may be to consider moving into his house yourselves if it were gifted to you, so that when you sell at a later date, there would be no capital gains tax. If your FIL lives for seven years, then the gift would fall outside his estate.

Hope this helps

Sam

carmen_blue

Thanks for your replies. No, he's not a widower (they divorced in the 1970s and he never remarried). It's also not an option for us to move in (not big enough for us and our children).

I know there's talk of raising the IHT threshold. Any thoughts on how likely this is with this government in power? It seems it's likely to happen if the Conservatives get in but who knows when that could be.

If he were to gift it to his children and we do it up and he dies within seven years, does that mean we are liable for both CGT and IHT?

Oldernotwiser

If you go ahead with this, who's going to pay the rent for another property for him to live in?

CLAPTON

carmen_blue wrote: »

Thanks for your replies. No, he's not a widower (they divorced in the 1970s and he never remarried). It's also not an option for us to move in (not big enough for us and our children).

I know there's talk of raising the IHT threshold. Any thoughts on how likely this is with this government in power? It seems it's likely to happen if the Conservatives get in but who knows when that could be.

If he were to gift it to his children and we do it up and he dies within seven years, does that mean we are liable for both CGT and IHT?

yes, both CGT and IHT

SeniorSam

carmen_blue wrote: »

Thanks for your replies. No, he's not a widower (they divorced in the 1970s and he never remarried). It's also not an option for us to move in (not big enough for us and our children).

I know there's talk of raising the IHT threshold. Any thoughts on how likely this is with this government in power? It seems it's likely to happen if the Conservatives get in but who knows when that could be.

If he were to gift it to his children and we do it up and he dies within seven years, does that mean we are liable for both CGT and IHT?

Carmen.....
If he dies within 7 years of gifting to you, then HIS ESTATE may be liable for the IHT if his estate is over his nil rate band allowance, not you. There is no carry forward allowance when a divorce has taken place.

The Capital Gains Tax would only apply to you if you disposed of the property after it had been gifted and then the CGT wiould be 18% of the Gain you had made from date of gift, less costs.

The talk about raising the nil rate band allowance significantly has been dampened by the overall financial position and this may not come about as expected with a change of government. However, there is always a possibility that some uplift would take place but certainly not £1M as originally muted. Just don't bank on 'possibilities'

Hope this helps

Sam

carmen_blue

Yes, his health is deteriorating but not at a rapid rate thankfully. He could probably stay where he is for another few years before needing more care but we'd rather get him somewhere sooner. He has steep stairs and they're just not safe. He's not cash rich at all (though keeping up the condition of his flat was never a priority anyway). The only way we could pay for his rental is through the rental of his current flat.

One more question, is IHT 40% of the value over the threshold less costs or do the costs of redoing the flat come into it at all?

CLAPTON

IHT is 40% of anything over 325,000 (after debts )
what he has spent during his life does not come into it.


Costs of doing up the flat would be relevate to CGT or could be offset against rental income for tax purposes depending upon the circumstances

Cook_County

Your other post said that you are a US citizen. Your children may be as well. Receipt of a gift of real property from an NRA would be reportable on Form 3520. You would be subject to US income tax on any eventual sale - calculated using your father-in-law's cost basis. If you US resident when this happensyou may end up paying State taxes on top of the 15% Federal tax.

You need joined up UK/US advice on this question.

Are you filing your annual US income tax returns and FBARs?

carmen_blue

Well spotted, cook_county! Yes I file my tax returns each year. I don't need to file FBAR I believe because I don't have enough money over here. I brought both my children down to the embassy when they were six weeks old to report their birth and get them US passports.

But good advice on getting my questions over to the other forum. I didn't know I could have to pay US tax on his property if we sold it after his death. Any way around this? Isn't there a reciprocal agreement? We'd be paying 18% CGT over here - would the US government really take 15% on top of that?! I'll get this over to the other forum. Thanks again - I really appreciate it.