House swap with son - tax implications?

usignuolo

i originally posted this on the Family Money thread but I think maybe it would be better here. Basically I have been thinking about a house swap with my son when he gets back to the UK in the next couple of years. I am semi retired but in good health and confident all things being equal of surviving another 7 years. What I do want to avoid is getting trapped in the gift with reservations net as far as tax goes if we proceed down this route.

Here is the scenario:

My son who works in the US was over for Christmas with his Canadian wife. They are expecting their first child next year and we were discussing where they would live, in NYC. They are keen to return to London where they met and would buy a house but it would only be a small one (his wife is a struggling musician so they would basically be dependent on his income. They want to have a couple of kids quite quickly and she will take a couple of years out to look after them.)

He is my only child and due to inherit the large rambling house where I live with my partner (his father). They would like to live here eventually anyway so we were discussing the possibility of his buying a house in London and then actually swapping houses with us.

He could only afford a much smaller house than this one but this is a family house and we are rambling around, so we could downsize and give them the larger property. This would not be a gift with reservations as we would actually move out into the smaller property. He would have a mortgage on the smaller house - we have a small mortgage on our larger house but could probably clear that to leave it unencumbered.

The net result we would be living in a smaller house which he owned and for which he would be paying the mortgage. There would be no mortage on our house. We could pay him some rent on the smaller house if that eased the tax position. Has anyone got any advice on the potential tax situation?

Suggestions on the other thread included selling a share of the house to my son or giving it to him outright and getting him to raise a mortgage on it and giving that money to me to buy another smaller house. Any other views?

CLAPTON

when do you want to do this?

seems to make no sense in him buying a small house...why doesn't he buy your house and you use the money to buy another one that suits you in a location that suits you?

property.advert

Logic, but not necessarily the law, seems to dictate that your son buy your house for whatever you need to buy the house you want. Perhaps buying something under its true value could give rise to a charge of tax avoidance but presumably that would need to be outside the inheritance tax limits.

There might be an issue on stamp duty if you sold a 500k house for 100k but I'm not sure who would look at it in reality and who says it is worth 500k and not 100k ? And if the numbers were not so different would anyone really ask ?

I found this on the web http://www.property-tax-portal.co.uk/taxquestion70.shtml and the only relevant consideration would be the potentially exempt transfer for IHT but quite who says what the property really is worth I do not know.

I believe I can sell my property for anything I want. If I need a sale in a week, I will get less than if I wait a year.

I'd get a lawyer but I don't see why you cannot even escape some if not all of the stamp duty (depends on the numbers involved).

usignuolo

My son cannot afford to buy my house for anything approaching its market value and I assumed, wrongly(?) that if I sold it to him well below market value, that might count as a "gift with reservations" for tax purposes.

usignuolo

Just found this on another site (dated 2005) where a couple were proposing to sell their house, valued at £500,000 to their daughter and son in law for £250,000.

.......Firstly, you are deemed to have sold the residence at market value for CGT purposes- although this will not be a problem if it is your principal private residence and has been throughout your ownership.

Secondly, the undervalue is deemed to be a potentially exempt transfer for IHT purposes- so if you survive seven years from the date of gift the amount (£250,000) gifted will drop out of your Estate for IHT purposes.

Thirdly, your daughter will be liable for stamp duty on the value of the transaction.

You need to talk to a solicitor about this, as if the sale price is £249,000 you could potentially save a considerable amount of stamp duty. "

<ends>

Not sure if this is still all true or if the law has been tightened up in any respect since 2005.

CLAPTON

usignuolo wrote: »

Just found this on another site (dated 2005) where a couple were proposing to sell their house, valued at £500,000 to their daughter and son in law for £250,000.

.......Firstly, you are deemed to have sold the residence at market value for CGT purposes- although this will not be a problem if it is your principal private residence and has been throughout your ownership.

Secondly, the undervalue is deemed to be a potentially exempt transfer for IHT purposes- so if you survive seven years from the date of gift the amount (£250,000) gifted will drop out of your Estate for IHT purposes.

Thirdly, your daughter will be liable for stamp duty on the value of the transaction.

You need to talk to a solicitor about this, as if the sale price is £249,000 you could potentially save a considerable amount of stamp duty. "

<ends>

Not sure if this is still all true or if the law has been tightened up in any respect since 2005.

this is mainly true except the bit about stamp duty

for stamp duty purposes the duty is payable on the market value and not the actual price paid (unless higher of course)... so even if the house was given to son then stamp duty would be payable on the 500,000.


You haven't really provided enough information about want you are trying to achieve and whether you are prepared to give your offspring value now or what.

Bear in mind that the conservatives have (sort of) promised to increase the IHT allowance to £1,000,000 each person) then will IHT be a problem?


there are basically three taxes that may or may not be applicable
-IHT
-CGT
-Stamp duty

and of course there may be considerations about deliberately depriving yourself of assets should you need to get state funded care in the future.

It would be usefu to have an idea about how much your estate is worth, are you married to your partner (that affects transferring your IHT allowance upon first death), much much are you will to give away before death and waht timescales are there for being willing to give.


In any event simply house swapping seems a most unsatisfactory solution... why spend the rest of your life in a property not of your choosing, maybe in an unsuitable area just because your offspring happens to find it suitable for their requirements now.

MrChips

One occasionally hears of people raffling off their property if they can't sell it on the open market, e.g. selling 10,000 tickets at £50 each. If you can do that, I can't see why you can't sell a house for whatever price you want to accept.

There would however be knock on effects on inheritance tax (potentially -depending on estate value, future changes to the threshold and how long you survive for) and stamp duty if you sold it for less than "market value". No CGT issues assuming it is your primary residence.

property.advert

GCT does not come into this so forget about it.

IHT will probably not come into it and would be tapered off to zero, even if it did. Amount would be value of property minus sale value minus IHT threshold @ 40% Could take out life assurance to pay this.

Market value is very hard to assess. One could sell it as a leasehold with terms which made its value much less or invoke any number of clauses in terms you prescribe when selling the property. Dividing the land may be useful, rights of way. If it hasn't been on the market for a long time and is not on an estate, then there will be little in the way of comparative evidence for property values and who knows in this market just what the true price is.

Wasn't some flat in Leeds sold for 60k when it has previously been sold at over 200k ?

I wouldn't try to go from 700k to 249k but I would go for below 500k.