Inheritance tax v Income tax & CGT

FredDogsMum

Hello All

Firstly I appologise for my rambling. I have just spent the entire evening working through the boards looking for a situation similar to ours so as not to ask the same old question over again, but have not found one so hopefully the people in the know out there will be able to assist and guide us.

My FIL is finally doing a will and has asked me to help him. This is something he has been putting off as his wishes are not easy to achieve. He has seen a solicitor but has been advised that what he wants may be contested and therefore may not be the best option.

FIL is 77 and in good health. Retired aged 55. Remarried aged 63 to someone who is 8 years younger than him. He has a good pension about £50k per annum including OAP. House is valued at £330K plus he has about £80K in cash.

Step MIL has no pension except OAP but if FIL dies first she will get a widows pension of £20K per annum plus OAP. When they got together she had £10k worth of assets, so house is owned by him and is in his name only.

What he would like to do is leave £30K plus his house to my husband who is his only birth child. His thoughts are that house is too big for Step MIL and the £50K and pension she gets is enough for her to rent somewhere and / or fund care home in the future.

Solicitor advised that Step MIL or one of her children could contest the will and a judge may say she is entitled to live in it until she dies, remarries, co-habits or goes to a care home, he may also give her the house or any % of it. As FIL is adamant that he does not want to leave us with the worry of anything like that he is now looking for ways no matter how radical to achieve his objective.

One idea that has been suggested is this.

Give house to son now, then pay a commercial rent each year, on which son will pay income tax and eventually CGT unless we move into house before selling it. We understand that FIL would need to live for 7 years in order for this to be excluded from his IHT calculation. FIL understands that there is a risk to this, however we are financially secure and marriage rock solid and hopefully nothing will ever change that, but we acknowledge the risk.

One of the questions about this that I can not find an answer to is if FIL lives beyond 7 years can we stop charging him rent and let him live there rent free without a tax implication.

If so assuming profit on rental is £6,000 per annum income tax would be £1,200 per year at todays rates. If husband inherited the house and £30K and Step MIL got £50K am I right in thinking IHT husband would pay would be £34K. So we would make a tax saving by paying income tax.

Any other suggestions no matter how radical greatly appreciated.

Thanks

FDM

tyllwyd

One thing that strikes me - if your FIL sadly passes away in, say, 15 years time, and he has already given you the house and is paying rent, and I assume he doesn't intend to tell his wife about the arrangement, you may be faced with asking a very elderly woman to begin paying rent or else start eviction proceedings. If you don't want to do that, you may have to let her remain in the house for the rest of her life - in which case, it might have been more advantageous to have inherited the house with her having the right to remain in it until her death.

FredDogsMum

tyllwyd - A good thought but FIL is quite open with MIL and is telling her what his wishes and plans are.

Thanks

FDM

Old_Wolf

FredDogsMum wrote: »

One of the questions about this that I can not find an answer to is if FIL lives beyond 7 years can we stop charging him rent and let him live there rent free without a tax implication.

No. The transfer to your husband makes the house a "gift with reservation of benefit" which means that regardless of how long your FIL lives the house will still remain part of his estate.

If he pays rent, the transfer ceases to be a gift with reservation and becomes a potentially exempt transfer, which then falls out of the estate after 7 years.

However, if he ceases to pay a market value rent at any time, even after seven years, the gift becomes a gift with reservation again and will fall back into the FIL's estate.

You can read more about gifts here - http://www.netlawman.co.uk/info/gifts.php

With regards to the amount of inheritance tax payable, it would be only on the amount left to your husband - transfers between spouses are exempt regardless of their value - so assuming the value of £330K for the house, and £30K cash, and a nil rate band of £325K you would pay at 40% on £35K, i.e. £14K.

John_Pierpoint

tyllwyd wrote: »

One thing that strikes me - if your FIL sadly passes away in, say, 15 years time, and he has already given you the house and is paying rent, and I assume he doesn't intend to tell his wife about the arrangement, you may be faced with asking a very elderly woman to begin paying rent or else start eviction proceedings. If you don't want to do that, you may have to let her remain in the house for the rest of her life - in which case, it might have been more advantageous to have inherited the house with her having the right to remain in it until her death.

That is is the now once again fashionable interest in possession trust; that "gives" half the house to the survivor of a legal union but prevents the survivor from squandering that half and makes it pretty difficult to squander the other half. [Short of going bankrupt]
There are CGT and valuations issues over half a house and when you have found how these work during the survivors life and at death, please let us all know.

[My dear old mum benefited from old rules that allowed children two principle private residences one of their own and one for their poor old widowed mother;), but what the hell we are all rioting individualists now, how dare the powers that be have a tax system that encourages marriage]

FredDogsMum

Old_Wolf wrote: »

With regards to the amount of inheritance tax payable, it would be only on the amount left to your husband - transfers between spouses are exempt regardless of their value - so assuming the value of £330K for the house, and £30K cash, and a nil rate band of £325K you would pay at 40% on £35K, i.e. £14K.

Old Wolf - Thank you info about the rent very very helpful.

Still can not decide if this is the best way forward. I always understood that when IHT was calculated that they took into account any amount left to spouse as part of the calculation from what you have said above I guess that has changed.

So if FIL gifts house, then pays commercial rent until he dies as long as that is after 7 years anything else he leaves husband will be IHT free as the whole value of his estate will be less than the threshold.

Husband in the meantime will pay income tax on rental profits and CGT on sale of house when it is sold, unless we go and live there.

Can anyone tell me what CGT would be at todays rates under the same scenario assuming house is sold and we have never lived in it. If its in both our names can be both have CGT relief ?

Many thanks
FDM

John_Pierpoint

To answer your last question: Yes both of you would qualify for half the rent and tax there on and both of you would get a CGT nil rate band of currently 10,600 each. Costs of improvements to the property are allowable against CGT. Repairs can be claimed against income tax on the profit from your rental business.

What became of the original MIL. Who is currently supporting her if she is still alive?

Do I get the impression that the step MIL has not been party to these discussions?!

If I was her I would be expecting a life interest and then live to get a telegram from the queen.:)

Family property is not ruled just by the tax office.

FredDogsMum

John_Pierpoint wrote: »

What became of the original MIL. Who is currently supporting her if she is still alive?

Do I get the impression that the step MIL has not been party to these discussions?!

If I was her I would be expecting a life interest and then live to get a telegram from the queen.:)

Family property is not ruled just by the tax office.

John - Thanks for info.
Step MIL not party to discussions but is being told what FIL's wishes are. He is adamant that he does not wish to leave the house to her and then subsequently her children. He believes my husband would be cut out and he does not want that. Also he does not want his will to be challenged if he leaves my husband the house on his death and solicitor adviced that this could happen. Hence the idea to give it away now.

He did originally go down the trust route but as Step MIL is younger he is concerned that say she lived to get that telegram my husband may go first and never get the benefit of his hard work. This way they both benefit.

FIL has a very good pension which he and Step MIL live on very comfortably and if he dies first she will benefit from a good widows pension. Enough to fund rent or care home in the future.

Original MIL never remarried she gets buy on a small pension and lives in a flat which she owns. They divorced when husband was a teenager so many years ago now Husband is only child.

Any alternative suggestions of a better way forward greatly appreciated.

Thanks
FDM

John_Pierpoint

I think the basic challenge is that, those who have been dependant on the deceased, should not be cut off with the proverbial shilling on his death.
Is father in law still supporting original MIL in some way?
Do you and your husband have any children?
[STRIKE]The law tends to ignore step children if they have not been adopted to create a legal family.[/STRIKE]

I have now had a chance to check further:

Assuming this is an England and Wales case, we are talking about:
Inheritance (Provision for Family & Dependants) Act 1975. (I think)

Unlike the intestacy rules, this covers step children and the divorced. I think the motivation is "Why should society end up paying for other people's brat's, toy boys/girls & alimony drones?".

Beneficiaries of this act are:
Surviving spouse
Former spouse if not remarried or legally relinquished any future claim.
Cohabiting "partner" of at least 2 years standing.
Child of the deceased.
Child in the family (ie step children - sister's orphaned love child.....)
Any other person being wholly or partly being maintained at time of death.

This is similar to divorce proceedings but I very much doubt it is as generous. The potential beneficiary probably has to demonstrate true dependence (Not the "I'll have to trade in the Merc for a Fiesta" type of dependence).

However going to court can pass a huge chunk of the estate to the lawyers.

I have absolutely no experience of such actions but this poster does. Perhaps they would like to join us or at least send a PM to the OP

https://forums.moneysavingexpert.com/discussion/3427455

[Personal message to the Original Poster]

TrickyDicky101

If your FIL gifts the property to his son then the CGT due on future sale is potentially a massive expense: the base cost for CGT purposes will be nil (it was a gift) so whatever you sell it for (reduced by the costs of any improvements over the years) will be the gain on which CGT is assessable (you do still get your nil rate band, but in terms of a property that could sell for £330k+ that's small beer). The benefit of inheriting the property is the base cost will be whatever the probate value of the property is (eg could well be £330k).

Mojisola

You also have to add the unexpected into the equation. What happens if your husband dies before his father? What happens if your OH develops long-term health problems and can no longer work? Owning a property will affect what state help he will be entitled. What happens if your OH had to go bankrupt? He would have to make his father leave his home and sell it.

Any of these things might seem very remote but they happen all the time to people who didn't expect to find themselves in difficulties. Plan for them and hope they never happen to you.