IHT on parental second home

mpppen

Hi,

I have a question pertaining to IHT on a second home which my parents own and which is currently rented out.

To minimise IHT I believe they can gift that property and then we're on to the seven-year-rule as to whether any tax is due. I also believe they are not allowed to gift the home and receive any benefit from it (i.e. rental income) as this would make it a gift with benefits and therefore subject to IHT.

What happens if they gift the property but we all decide they want to live in it in the future. How does that work? Are they allowed to move into it after the seven-year-rule has elapsed without penalty for example? Or am I allowed to give them the rental income after the seven years has elapsed and it still avoids IHT (so long as they declare it as income)?

Thanks for any help!

PEN

SeniorSam

Gifts cannot be made where a benefit is retained. If they gift the house, they cannot have a benefit, but if they were living there, gifted it and paid a FULL market rent to stay there, then the gift would be exempt from IHT if the estate is above the nil rate band and the gift had exceeded 7 years.

Sam

nomunnofun

Has any consideration been given to the capital gains tax position on the potential gift of what is a second property?

mpppen

Thanks both.

Yes we have considered the CGT implications and that would factor into the decision making process.

Sam, I don't quite understand your last sentence.

Say we proceed and they gift the property getting no rent for that period. Once the seven years are up, can I thin do what I want with that property free of IHT risk - i.e. pay them any rent after that period has elapsed or let them live there free of charge? I.E. once seven years is up is that with regards to gifts with benefits?

Thanks

nomunnofun

mpppen wrote: »

Hi,



Or am I allowed to give them the rental income after the seven years has elapsed and it still avoids IHT (so long as they declare it as income)?

Thanks for any help!

PEN

This is as incorrect as it could be! You would own the property and therefore be liable for the tax on the profits regardless as to who actually receives the income.

xylophone

Presumably you would take expert, qualified advice before entering into any transaction?

Might you need to have regard to Pre Owned Assets Tax? (POAT)

http://www.hmrc.gov.uk/inheritancetax/pass-money-property/pass-home-to-children.htm

http://www.gsfwsolicitors.co.uk/assets/files/PDFs/Pre-Owned_Assets_Tax_Fact_Sheet.pdf

zzzLazyDaisy

Put simply....

A gift, is a gift, is a gift.

It is yours to do with whatever you like, rent, sell, live in.

A gift has no strings whatsoever, and the person giving the gift gives up all rights to it, not just now, but in the future, and forever.

What you and your parents are planning to do is to remove the property from your parents' ownership temporarily for 7 years to avoid IHT and then return the benefits of the property to them, whilst you nominally retain ownership.

HMRC have this covered and would certainly investigate. There is a high risk that your parents would pay CGT on transfer to you, and then the property would still fall to be assessed for IHT on their deaths anyway (in which case there is no allowance for the CGT already paid, so that's a double tax whammy).

If your parents are planning to go down this route they need to take professional IHT and tax planning advice.

Credit-Crunched

I agree - seek professional advice, pay for it. I have seen some very very dangerous advice on this forum regarding IHT planning.

IHT planning is a very detailed and complicated arena, with significant financial ramifications if undertaking incorrectly.

Just some generic information on gifting the home.

If your parents retain use of it, in 2 years or 20 years, it is classed as a 'gift with reservation of benefit' and would remain within the estate.

if your parents 'gift' your their house to you, here are some considerations

i) rent received requires self assements completed, and is added to your employed income and could provide tax problems

ii) commercial rent must be paid, so your parents would need to have a disposable income to pay it

iii) as a landlord you would need to complete gas safe checks etc

iv) as your asset, if you, your wife, partner etc divorce then it is an asset that can be claimed through the courts, resulting in your parents losing half the house, maybe more

Think of these first, then seek professional advice.

Far far too many forum 'experts' here who have read the money sup in the times and are now specialist tax advisers!

http://www.hmrc.gov.uk/inheritancetax/pass-money-property/pass-home-to-children.htm

00ec25

if they gift it to you but then subsequently move back into the property and DO NOT pay to you the full market rate rent that the property would earn if let to someone else, then they will fall foul of the pre owned assets rule and be subject to income tax on the benefit in kind they derive from living in an asset they now occupy for free/at below market rate rent

this would be in addiiton to the fact that, as advised above, it would put them back into IHT

SeniorSam

PEN, all the above is correct. A gift must be a gift. No strings attached and no benefit from that gift at all. They can give it away, but if they were to be in the property in the 7 year period, they would be there as tenants and would need to pay a full market rent, otherwise the gift would fail.

Once the property has been gifted correctly, it is then owned by the beneficiaries of the gift. So all rent would be theirs and if they wanted to sell it or give it away, it's up to them.

Always best to take proper advice from someone dealing within Inheritance Tax Planning, which all advisers and solicitors do not. Seek a specialist if the estate will be over the £325,000 allowance limit each, or a married couple £650,000. Also make sure that the couple have tax efficient Wills in place, as my wife and I have.
There are other ways to lower the value of an estate and a good adviser will explain all to you.

Sam

holly_hobby

There was a very similiar thread earlier this week (parents gifting to children to avoid IHT). And in which I discussed GWR and POAT regs.

If parents gift you the property, and have no further interest or benefit for it (inc any share of rental income), then IHT wise, it will be only be subject to PET regs - which are relevant where their NET estate on death exceeds nil rate IHT threshold (which is currently 325k per person, or UPTO 650k for a married couple and on application of transfer via estate administrators).

They will however be exposed to a CGT calc on the transfer, based on any period which doesn't qualify for PRR relief, and assessed between the acquistion price or market value (if inherited or gifted), and the market value at the time they gift the property to you (less qualifying reliefs, allowances and exemptions).

SDLT - there will be no stamp duty if there is no considration given in exchange for the property (ie money or other benefit).

If at a later date your parents want to inhabit the property as their main residence, then to avoid POAT exposure, they must pay the full market rent from post tax income for the duration of their tenancy.

The tenancy must be reviewable, and must be administered under a traditional landlord/tenant relationship, inc the bearance and responsibility of costs to each party, that would be evidenced under such a relationship.

If HMRC are able to prove that you/they have failed in any of the above requirements, then parents are open to income tax on the benefit of reduced/no rent, POAT regs are triggered, which is based on the indvidiuals honesty in their SA (see below), but may well be rumbled on their death - when the revenue will from their estate.

If POAT regs are triggered, and if the value of the benefit is in excess of 5k pa per person (10k pa jointly for a married couple as with your parents), then the whole benefit is reported as part of their income via annual SA.

If the annual calculated benefit is below the above figs, there is no HMRC requirement to declare the benefit as part of annual income. There are rules regarding assessment of benefit, which is reviewable every 5 yrs, from initial assessment/valuation of market rent giving the resulting POAT benefit tha may be exposed to IT.

If they fall foul of POAT, and the resulting income tax is too great to bear, they may elect (it is NOT automatic by HMRC as suggested - or in some cases difficult due to complicated scheme arrangements), to instead have the property treated under GWR instead of POAT regs - which means it falls back into their estate, with IHT exposure on that and any other non-exempt transfers applicable at death, if their total net estate exceeds the available nil rate band.

Of course, if your parents are healthy and otherwise here for a long time (please god), then they may want to consider what the most cost effective method will be, pay market rent/pay below mkt rent and be subject to inc tax on POAT benefits OR whether actually being exposed to IHT will considering the possible longevity of any rental/POAT arrangement, be the most cost effective way of managing their estate (if as I say it is likely to be exposed to IHT on death).

If instead of parents just moving in and after tenants vacate, you later instead all decide to move into the dwelling together, and you effectivelly equally share the running costs and bills on a 50/50 basis, then it may be argued only 50% will be re-exposed to GWR regs, your tax practioner will guide.

An additional idea could be to have a self contained area within the dwelling for parents (i've no idea how big it is of course or this would be permissible), with the arrangement to pay rent to you in exchange for their residency there (don't forget to consider POAT regs above).

The property, under your legal ownership, will also form part of your own estate for IHT purposes and of course you will be exposed to CGT on its disposal (less any qualifying reliefs, allowances, exemptions and deductions).

POAT regs and mitigating IHT can be complex and fraut with issue that outweigh the perceived benefit, which may be costly if you get it wrong on a high value asset(s).

So please use forum comment only in its intended context as general chat ...... and do obtain indemnified and relevant advice to your situ from a tax practioner (or even HMRC directly although they won't give you IHT planning !), as to save any possible future heartache and avoidable situations - as you can see there are differing comments in this thread alone, so nailing this is essential for all.

Hope this helps

Holly x

PS - have popped back and dug out and attached HMRC ref notes for some guidance for you, contains the most salient points to get you started and familiar with POAT workings .... http://www.hmrc.gov.uk/poa/poa_faqs.htm