Paying inheritence tax after 15 years

xinran

15 years ago, my friend's MIL died leaving her estate equally between her children (my friend's husband and his two siblings), with provision that a smaller property be bought from her estate and that her second husband live there for life. This was done, with the property being owned jointly in the children's names, "rented" to their stepfather at peppercorn rent.
At the time the full estate was valued below the Inheritence tax threshold, so no tax was paid by the estate.
Her second husband recently died, and the property is to be sold with the proceeds going to her three children.
The property has now increased in value from 15 years ago, but the whole estate is below the current Inheritence tax threshold, (although it is now above what was the threshold 15 years ago).

What are the tax implications for the children? Will there be any Inheritence tax to pay, or will there now be capital gains tax to pay on the profit between the proceeds and the (indexed) cost from 15 years ago?

Thank you very much for any advice.

Savvy_Sue

I could be quite wrong here, but surely if the new property was owned by the 3 children, then that's part of the inheritance they got, and they got it then, so IHT is no longer an issue. CGT on the other hand probably IS an issue.

If I am wrong, someone much wiser than me will come along and explain ...

pauletruth

think savy-ue is right. its been assessed once for IT and is owned by the children so no tax there. CGT needs looking at don't forget your allowances. did you declare the rent even if it was only a few quid.

xinran

Thanks for the replies. That makes sense. I wondered whether as the provision to provide a property was part of the will, that inheritance tax was still applicable, only delayed.

With CGT allowances, and indexed cost, it may not amount to much.

No - no rent at all. Peppercorn rent is exactly that - one peppercorn a year.

pauletruth

that would be interesting to see the tax demand for.

nom_de_plume

xinran wrote: »

Thanks for the replies. That makes sense. I wondered whether as the provision to provide a property was part of the will, that inheritance tax was still applicable, only delayed.

I found this which touches on the subject, although it describes inheriting an existing property rather than the purchase of an alternative. There are similarities with your described situation, in particular the concept of your friend's inheritance appearing to be a 'gift with reservation'.

Deffo one for the experts!

Savvy_Sue

Yes, I wondered if there were 'gift with reservation' implications, and possibly tax implications of NOT charging a market rent, but needs an expert (paid) to go through the individual situation and advise, IMO.

eddtheduck

As far as I know it cannot be a 'gift with reservation' because MIL could not retain any benefit herself. Instead she has created (in her will) a 'life interest' for the stepfather in the new property bought for him.

I believe that this particular form of life interest is called an 'interest in possession trust'. See here http://www.hmrc.gov.uk/trusts/types/iip.htm here http://www.hmrc.gov.uk/trusts/iht/which-trusts-pay.htm and here http://www.hmrc.gov.uk/trusts/iht/death.htm

This is a bit complicated to understand! - It looks like (from the second webpage above) that there is no IHT to pay on MIL's estate because the house was not 'relevant property' - but from the third webpage above that the value of the house has to be included in the stepfather's estate for IHT purposes, even though he didn't actually own it (but as you say, the current value is below the IHT threshold).

Stepfather's executors (is that MIL's children?) will probably need to include details of the house when filling in the IHT form for his estate - did he have any other assets which taken together with the value of the house would take his estate over the current threshold?

CGT will definitely be payable when the house is sold, but I am not sure if legally it is the trust selling it (in which case there is only one CGT allowance for the trust, and it's half that of an individual) or MIL's three children (in which case they each have their own individual's CGT allowance).

I would be talking to a specialist tax lawyer to sort this out!

John_Pierpoint

This is almost certainly an interest in possession trust for the surviving spouse.
If I am right it should have all the tax advantages of leaving the property to the surviving spouse and waiting for the second death; plus protection from excessive care home charges and the risk that the survivor might remarry or go funny in their old age and do something irrational with their family inheritance.

However you need someone confident about the taxation of trusts to explain the exact position to you.

http://www.hmrc.gov.uk/manuals/cgmanual/CG36550.htm
http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM11032.htm
http://www.hmrc.gov.uk/inheritancetax/intro/transfer-threshold.htm#6
http://www.taxinsider.co.uk/699-Main_Residence_Relief_For_Trustees.html
http://uk.practicallaw.com/5-526-6105?source=relatedcontent

[I had a similar situation with the estate of my late grandmother, though it was the existing house where two "elderly" women lived together and I had to sort out the situation on the second death, when the survivor just failed to get a telegram from the queen:
"rented" to their stepfather at peppercorn rent.
I don't know if I struck lucky with the capital taxation office, but we agreed to treat the situation as an interest in possession trust of a property, then worth almost exactly the then nil rate IHT band.]

Treevo

CGT should be payable on the increase from when your friend could realise their investment. In other words when their stepfather died.

But don't quote me on that.

eddtheduck

CGT should be payable on the increase from when your friend could realise their investment. In other words when their stepfather died.

But don't quote me on that.

I just did.

I doubt that very much - it would be payable on the difference between the selling price (now) and the buying price 15 years ago.
However, you can also deduct from that figure the buying and selling costs, and also the costs of any improvements made by you - things like (say) extensions, or installation of a central heating system where there wasn't one previously - but not general maintenance.