Tax efficient father to son property transfer

dylanjh

Hi Everyone,
I currently live in a house owned by my parents, although they dont live there. Mortgage is paid off, so it's 100% theirs.
I want to buy this property off them, and we are trying to figure out the most tax efficient way of doing it.

It been suggested that a PET (Potentially exempt transfer) could be done. My parents provide me with an interest only mortgage, with the balance coming out of my share of the estate when they die.

Anyone have any ideas / see any problems with this?

I presume I will have to CGT at some point?

Thanks in advance

silvercar

See an inheritance tax specialist would be my advice.

No CGT on death.

G_M

Either you buy it, with or without a mortgage, provided by parents or traditional lender.
Or they give it to you as a gift, either fully or partially.

Gift - parents must live 7 years to avoid you paying inheritance tax.
CGT - they may have to pay this if they do not live there. You live there so will have no CGT liability.

The PET option sounds complex, as it is a combination of buying it, and inheritance (IT liability.)

I suggest speaking to a speacialist in tax/inheritance/wills etc.

00ec25

In tax terms you and your parents are “connected persons” (parent/child) – this is important

Transferring a property to a child in tax terms is a “disposal”

It is your parents who will have to pay CGT – because it is a connected person deal then even if they give it to you for free, sell it to you for £1 or transfer it to you under any form of finance arrangement you care to set up (set as your private mortgage deal) then the parents will be deemed to have made a disposal and will be assessed for CGT on the basis of the full market value of the property at the time of the disposal
As the parents have never lived in the property then the CGT liability will be the difference between what the market value at time of disposal and what they originally paid to buy it less any cost (eg EA fees on purchase , solicitors/legal fees etc)

Not clear from your post but assuming both mother and father own the property jointly then each person will have to do a tax return showing their share of the transaction. Each person is entitled to an annual tax free amount, for example:
Market value at disposal 150,000
Original purchase price 103,000
Fees and associated cost say £3,000
Gain on disposal 150- - 103 – 3 = 50,000
Gain for each person 50/2 = 25,000
Taxable gain for each person 25,000 –personal annual allowance 10,100 = £14,900
So in that case both your mother and father would have to pay CGT at either 18% or 28% on 14,900

So in simple terms there is no tax efficient way to do this if each parent has a net taxable gain greater than £10,100 each will have to pay CGT when the transfer goes through.

In complex terms you could set up a Trust but you would need very good quality professional legal advice as getting it wrong would not be a good move with HMRC

In terms of IHT you correctly understand the PET implications – the value would again be the open market value at time of transfer.
If you did indeed do an interest only “mortgage” with parents I’m sure you realise they would have to pay Income tax on that income stream.

So all in you would get the property tax free but some tax implications fall on your parents now with the capital value of the property being a PET under IHT falling on the estate (and ultimately your share of it if there are other beneficiaries under their will – please say they have got a will!)