Inheritance tax + building a extension

fted

Myself and my brother have recently got job near my parents and we where wanting to build a annex onto my parents house. We planned to split the costs between myself and my brother and live in the house.

The only issue I can see is inheritance tax. At the moment the house is valued around 580k, so we are currently not liable for any inheritance tax. If we build the extension the house might be worth between 750-800, which would mean we would be liable for a large tax bill.

Does anyone have any suggestions on how to best deal with this problem? It seems to me that a large reason the house price is rising is myself and my brother investing 150k. If we then end up with a tax bill for 70k it seems like the scheme isn't viable.

somethingcorporate

With those sorts of numbers you should go and see a qualified tax planner rather than taking advice from anonymous posters on a website on the internet.

zygurat789

fted wrote: »

Myself and my brother have recently got job near my parents and we where wanting to build a annex onto my parents house. We planned to split the costs between myself and my brother and live in the house.

The only issue I can see is inheritance tax. At the moment the house is valued around 580k, so we are currently not liable for any inheritance tax. If we build the extension the house might be worth between 750-800, which would mean we would be liable for a large tax bill.

Does anyone have any suggestions on how to best deal with this problem? It seems to me that a large reason the house price is rising is myself and my brother investing 150k. If we then end up with a tax bill for 70k it seems like the scheme isn't viable.

It is the net value of the whole estate which is liable to IHT. This £150K should be liable to a mortgage charge and should, therefore, be taken out of the value of the estate before arriving at the net value.

AndyJR81

If you're going to be living there your parents could gift you a share in the property, thereby reducing the value remaining in their estate. They would need to survive 7 years from making the gift for this to be effective, and you definitely need to speak to a specialist. Where are you based, as I might be able to recommend someone who can give you a free initial chat

nomunnofun

AndyJR81 wrote: »

If you're going to be living there your parents could gift you a share in the property, thereby reducing the value remaining in their estate. They would need to survive 7 years from making the gift for this to be effective, and you definitely need to speak to a specialist. Where are you based, as I might be able to recommend someone who can give you a free initial chat

It would appear to me from first reading that the parents will be continuing to live in the property.

AndyJR81

nomunnofun wrote: »

It would appear to me from first reading that the parents will be continuing to live in the property.

That doesn't matter if the children are actually living there as well, its not a reservation of benefit as the parents are still living in their share of the property. I'm trying to find a detailed article/example to link to

AndyJR81

http://www.taxinsider.co.uk/883-Sharing_the_Family_Home_an_IHT_Saving.html

There you go - not something that should be done by DIY it goes without saying. See an IHT specialist and mention this to them

CLAPTON

is the parents house currently mortgage free?

how will the extension be financed?

will your parents continue living in the house?

will you and your brother both live in the annex

do you or your brother have any other property

will your parent continue to own the (enlarged) property or do you expect that all four will share ownership

you don't say your age or family situation but what if you or your brother want to move out or acquire a spouse or partner etc.

fted

is the parents house currently mortgage free?

Yes

how will the extension be financed?

mortgage against the house

will your parents continue living in the house?

yes

will you and your brother both live in the annex

yes

do you or your brother have any other property

No

will your parent continue to own the (enlarged) property or do you expect that all four will share ownership:

We are all happy to do what is most tax efficient.

you don't say your age or family situation but what if you or your brother want to move out or acquire a spouse or partner etc.


Both myself and my brother are 35/36 with girl friends, but not married. My parents are in their 80s. We are looking to pay of the mortgage pretty quickly e.g 5 years, as we all now work and live in the same area and we don't want to pay rent this seems like a good option. We would look to keep the house with one of the brothers living in the extension and then we club together and buy a second property.

fted

Many thanks for the replies, especially for the link Andy posted it helped me understand the situation very well.

I've consulted a tax advisor and their recommendation was that we draft a Statement of Trust and that my name and my brother be added to the legal title.

So a TR1 will be executed by all four of us. we will tick the box that say that the title is subject to a declaration of trust. The declaration of trust will then set out the proportions that the house is owned and indemnify my parents if their are any problems.

The proportion in which the house will be owned will be determined by getting 3 valuations of the house from estate agents before we start work and then valuations after. The statement of trust would basically ring fence the extension off from my parents estate so if for example the second set of valuation show that the price of the house increased by 30% after the extension we would roughly split the house value 70:30.

The mortgage will be taken out with all four of our names on it, however it will be just myself and brother paying any money. As my parents are over 80 this makes getting a mortgage harder, but my mortgage broker says that their are some lenders who can do it.

Does any of this sound wrong?

John_Pierpoint

Beware of the council tax department trying to claim there are two properties liable to council tax - a problem for those trying to organise "a granny flat".

There is an extensive thread on here from someone who discovered they had bought a granny flat in what they thought was just a family home.