IHT query about gifts with benefits

LuluBlue_2

If a parent gifts two thirds of his home to his adult children (i.e. afterwards he owns 1/3, child 1 owns 1/3 and child 2 owns 1/3) but continues to live it in I understand that the 2/3 he has given away is a gift with reservation and is subject to inheritance tax (IHT) unless he pays a fair market rent to the children. Is there a time limit on this or would the gift become exempt after some time had elapsed (assuming no rent is paid)? If the gift was made before a certain date is is exempt (i.e. if it was made years ago before the gift with reservation rules came in?)
Thanks for any help!

ceeforcat

It will always remain as part of his estate. Worse than that, if the house is subsequently sold, the children will be liable to capital gains tax on two-thirds of any profit made over and above the value at the time of the gift on the basis that it is not their main residence. The house, formally free of any tax implications, could well contribute to both Inheritance tax and Capital Gains tax liabilities.

LuluBlue_2

Crikey, yes I suppose that makes sense. Thanks so much for the reply.
Basically the dad has divided the house between the three of them to try to spread the IHT liability thinking that after 7 years it would all be free and clear, but has now realised there's this gift with reservations rule. What do HMRC look at to check that a market rent has been paid, would it be enough for the children to file a tax return each year saying they have received x in rental income from him (and pay any income tax due on this) or would they look for proof that this has actually been paid (i.e. a monthly sum paid into child's bank account)?
I'm wondering as well if the dad's IHT allowance would be just the £325,000 or would he be entitled to £650,000 as his wife died in 1989 and her half of the house passed to him IHT free as her spouse? It's all very complicated

ceeforcat

The Revenue will want to see documentary evidence. What about the CGT?

The calculation of the IHT allowance depends on the value of your mother's estate and the percentage of the threshold used. In 1989 it was 110000 up to 5th April and 118000 thereafter. In the first scenario - if your mother's estate was worth £44000, she 'used up' 40% of the threshold. Your dad's threshold is increased by 60% to £520000.

LuluBlue_2

Thanks very much this has been helpful.

xylophone

http://www.hmrc.gov.uk/inheritancetax/intro/transfer-threshold.htm
If someone leaves everything they own to their surviving spouse or civil partner in this way it's exempt from Inheritance Tax. It also means they haven't used any of their own Inheritance Tax threshold or nil rate band.

John_Pierpoint

From the dates you have mentioned you have missed out on the dependant relative provision that allowed a child an extra CGT free house, provide it was occupied rent free by a pensioner parent.
It could also be IHT free on the second death if it had paid any death Duties upon the death of the first spouse to go and was then still (partly) beneficially owned by the survivor. [A provision that encouraged the husband to leave half the house to the children and leave the wife with a life interest to occupy the other half].

I would doubt that there are many of these estates left now:
http://www.taxationweb.co.uk/forum/dependent-relative-exemption-t34445.html

ceeforcat

xylophone wrote: »

http://www.hmrc.gov.uk/inheritancetax/intro/transfer-threshold.htm
If someone leaves everything they own to their surviving spouse or civil partner in this way it's exempt from Inheritance Tax. It also means they haven't used any of their own Inheritance Tax threshold or nil rate band.

Absolutely - I should have mentioned that.