Pre Owned Asset Tax

football_widow

Hello
this is my first post, just looking for some advice.

My mother has sold her house and is paying for an extension to be built on my house. She'll then live in it.

I understand there's a tax called Pre Owned Asset Tax which we need to consider as she'll be benefitting from living in something she's paid for?

I would imagine the market rent for the extension would be under £5000pa, which I understand means she'd be exempt from the tax, but does she actually have to pay the rent to me?

We do intend seeing my Solicitor before she moves in to draw up a will, but not sure if he'd have the knowledge of tax law to advise us on this, so if there are any tax experts who can give us an easy to understand explanation, I'd be most grateful!

TIA

football_widow

holly_hobby

Firstly, is your own propety mortgaged ? If so you will need the lenders agreement to add an annex with mum resident, plus necessary planning permissions etc.

If not, adding Mum to deeds may circumvent the Pre Owned Asset Tax (POAT) issues, as essentially she will be a joint owner of the property, either under tenant in common (she leaves her share to you on death), or joint tenancy arrangement (automatic tsf to surviving owners on death) - this will be a transfer of equity exercise and your conveyencer will guide, if less than 125k is given by Mum for the annex, they're won't be any stamp duty (SDLT) incurred.

With respect to POAT regs, in a nutshell this is essentially where to avoid the gift which the donor continues to benefit from, being treated under Gift With Reservation (GWR) regs, a market rent is paid, or the donor (if the benefit exceeds 5k pp ie 10k per couple) instead choose's to suffer an income tax penalty calculated on the difference between actual rent paid (if any) and the open market rent OR they may instead elect to leave the gift to be dealt with within her estate under Gift With Reservation regs on death.

Essentially, POAT or GWR is really only to worry about if Mums net estate is likely to exceed available nil rate exemptions (currently 325k pp frozen until 2017), however if there is unused previously deceased spousal exemption available, this may be added to Mums nil rate exemptions taking her possible exemption to 650k at current rates (ie 2 x 325k) - if IHT liability is not an issue, then you can stop reading here.

But if IHT is likely to be an issue and the derived rental benefit exceeds 5k pp pa, and you seek to later claim POAT exemption adminisering Mums estate, yes you may be asked by HMRC to evidence rental payments from Mum to you to quanitfy the relief. Of course net (of permitted deductions) rental income must also be declared to HMRC under annual self assessment.

You also need to be aware that if Mum's occupany can't be classed as a lodger, you may well have later CGT issues in respect of the % of property "rented/let" - your accountant will guide, but I've included a ref below.

You have the basic grasp of POAT, so sure you;ll be able to understand the following bit of ref material I've dug out for you ....

POAT regs - FAQs
http://www.hmrc.gov.uk/poa/poa_faqs.htm#1
http://www.hmrc.gov.uk/poa/poa_liable.htm

IHT - transfer of unused pre deceased spousal allowance
http://www.hmrc.gov.uk/inheritancetax/intro/transfer-threshold.htm

CGT - partial letting guidance
http://www.hmrc.gov.uk/cgt/property/sell-own-home.htm#4

Hope this helps

Holly x

football_widow

Hello Hobby
many thanks for your reply, its most helpful! I will take a look at the links and hopefully have more of an understanding of it.

But from what you say, Mums estate will be under the £325k limit, so we don't really need to worry about it. And presumably as she'll be living in something she's paid for we won't faul foul of the deprivation of assets rule if she ever has to go into a residential home -but I guess thats a question on another board!

Planning permission had been granted 18 months ago - took a little longer than we thought for for Mum to sell her house - sp building work only started just before christmas, so hopefully the extension will be finished within the next 4-6 weeks.

My property is mortgaged and when I contacted the Mortgage Co to let them know we were starting the building work they weren't really interested, they said so long as we werent knocking the house down and rebuilding they said they didn't need to know what we were doing.

Thanks again for your help

football_widow

CLAPTON

football_widow wrote: »

Hello Hobby
many thanks for your reply, its most helpful! I will take a look at the links and hopefully have more of an understanding of it.

But from what you say, Mums estate will be under the £325k limit, so we don't really need to worry about it. And presumably as she'll be living in something she's paid for we won't faul foul of the deprivation of assets rule if she ever has to go into a residential home -but I guess thats a question on another board!

Planning permission had been granted 18 months ago - took a little longer than we thought for for Mum to sell her house - sp building work only started just before christmas, so hopefully the extension will be finished within the next 4-6 weeks.

My property is mortgaged and when I contacted the Mortgage Co to let them know we were starting the building work they weren't really interested, they said so long as we werent knocking the house down and rebuilding they said they didn't need to know what we were doing.

Thanks again for your help

football_widow

just to clarify

-is the annex an integral part of the house?
-will your mother own the annex or own part of the whole house?
-will the annex be separate for council tax purposes?

holly_hobby

football_widow wrote: »

But from what you say, Mums estate will be under the £325k limit, so we don't really need to worry about it.

Quite - and if she has a pre-deceased spouse in the background, it could be right up to 650k (at current rates, and depending upon his death being post 1975, and any non-exempt gifts he may have made in his lifetime) - which is simply just 2 x individual IHT exemption band.

football_widow wrote: »

And presumably as she'll be living in something she's paid for we won't faul foul of the deprivation of assets rule if she ever has to go into a residential home -but I guess thats a question on another board!

Not quite, if she won't own any part of your property (ie she is not to be added to deeds), yes she could fall foul of Deprivation of Assets regs (given that she has sold her own home, gifted you an element/all of the proceeds/cash and lives in a dwelling she has no legal claim over). HOWEVER, for this to happen the local authority would need to sucessfully cite that mum was aware at the time the gift was made that she was likely to need long term care, and that the gift was a deliberate act to avoid having to fund such care. Whilst there is no timebar on when this can occur, if she applies for assistance within 18 mths or so (and depending if the underlying medical condition was already know at that point), she'll fail. Anything after that, with no prior history in medical notes etc, will be harder (but not impossible) to argue.

football_widow wrote: »

My property is mortgaged and when I contacted the Mortgage Co to let them know we were starting the building work they weren't really interested, they said so long as we werent knocking the house down and rebuilding they said they didn't need to know what we were doing.

Did you clearly tell them you were building a self contained annex for someone (whom is not party to the mortgage) to permanently live in ?

If so great (retain a note of the name and dept of the individual ).

If not, then you may find they're not so happy about thisonce in possession of the full facts, given that the addition of a s/c annex can actually negatively effect the value of a property due to a more restricted marketing audience.

Don't forget to also note that you'll have to have the deeds amended if you 've increased the sq footage of the living area of the property (ie extended into garden or converted garage etc), as oppossed to just tinkering with the internal layout/installing en-suite or dstairs loo, that kind of thing .

Hope this helps

Holly xx

football_widow

CLAPTON wrote: »

just to clarify

-is the annex an integral part of the house?
-will your mother own the annex or own part of the whole house?
-will the annex be separate for council tax purposes?

Hi Clapton

- the annexe has been built where a detached garage/shed used to be, but is attached to the main property with a shared hallway - an bedroom and bathroom has been built above as additional accomodation to the main house. Our planning notice stated: "Erection of extension to provide additional accommodation and granny annexe"


- the plan is she wont own the annex or part of the house,

- we've checked with our council, the annex will be exempt from c tax when occupied by mum, and exempt when unoccupied

football_widow

holly_hobby wrote: »

Quite - and if she has a pre-deceased spouse in the background, it could be right up to 650k (at current rates, and depending upon his death being post 1975, and any non-exempt gifts he may have made in his lifetime) - which is simply just 2 x individual IHT exemption band.


Not quite, if she won't own any part of your property (ie she is not to be added to deeds), yes she could fall foul of Deprivation of Assets regs (given that she has sold her own home, gifted you an element/all of the proceeds/cash and lives in a dwelling she has no legal claim over). HOWEVER, for this to happen the local authority would need to sucessfully cite that mum was aware at the time the gift was made that she was likely to need long term care, and that the gift was a deliberate act to avoid having to fund such care. Whilst there is no timebar on when this can occur, if she applies for assistance within 18 mths or so (and depending if the underlying medical condition was already know at that point), she'll fail. Anything after that, with no prior history in medical notes etc, will be harder (but not impossible) to argue.



Did you clearly tell them you were building a self contained annex for someone (whom is not party to the mortgage) to permanently live in ?

If so great (retain a note of the name and dept of the individual ).

If not, then you may find they're not so happy about thisonce in possession of the full facts, given that the addition of a s/c annex can actually negatively effect the value of a property due to a more restricted marketing audience.


Don't forget to also note that you'll have to have the deeds amended if you 've increased the sq footage of the living area of the property (ie extended into garden or converted garage etc), as oppossed to just tinkering with the internal layout/installing en-suite or dstairs loo, that kind of thing .

Hope this helps

Holly xx

Hi Holly

- She was widowed 4 years ago, at the time, Dad's estate was under 325K then.

- she did have a hip replacement last year, but other than that she's fit and well at the moment, she lived a 2 hour drive away and after dad died she made the decision to sell up and move to where we live. Her original plan was to buy a bungalow to move into on her own, but our house had the space to extend which is why we went down this route.

- I can't remember if I said it was a granny annexe or an extension when I spoke to the mortgage co to say building work was staring.

- I've got some major decisions to make then, I'm going to have to decide what to do when my fixed term comes to an end and mum moves into the extension - do I stick with my current mortgage co and change product based on a valuation of the house with the extension & mum living in it but as a non-owner? Or if changing products do they just base the valuation on the price we bought it for and any regional increase/decrease in prices? Forgive my ignorance, but I've never re-mortgaged before so not sure.

- Or would I have to apply for new mortgage with them if mum is going to be living with us; or do I apply for a new mortgage with a diff company. I shall get in touch with my current provider and see what my options are.

Thanks for your help Holly,

CLAPTON

football_widow wrote: »

Hi Clapton

- the annexe has been built where a detached garage/shed used to be, but is attached to the main property with a shared hallway - an bedroom and bathroom has been built above as additional accomodation to the main house. Our planning notice stated: "Erection of extension to provide additional accommodation and granny annexe"


- the plan is she wont own the annex or part of the house,

- we've checked with our council, the annex will be exempt from c tax when occupied by mum, and exempt when unoccupied

does the annex have a separate kitchen or will she eat in your part of the building

football_widow

CLAPTON wrote: »

does the annex have a separate kitchen or will she eat in your part of the building

it will have a separate kitchen

holly_hobby

Ok, well its Dads amount of unused IHT band thats relevevant (which if it all went to mum, with no other non-exempt gifts, means 100% of 325k is available), not just that his estate fell within 325k.

Re the annex set up, I would be v surprised if the lender was actaully aware of the true nature of the extension, as I said earlier, its actually a s/c annex where there'll be no rental agreement, rather than an extension to your family living area, which may have been implied in your conversation with them. The problem with the annex will be it is occupied by an individual whom is neither party to the mge, nor has signed a consent to vacate disclaimer (which the lender will want if they do approve the granny annex and residency). The 2nd kitchen is also a problem regarding their security and onward sale on any succesful possession order, why is discussed below.

This sc nature of the annex will also make it v difficult for re-sale, as if your purchaser requires a residential mortgage of any amount, the 2nd kitchen will have to be removed pre completion (due to the implications taking into a multi-unit property which won't fit a resi mge) , which will mean you pay and facilitate this, or you narrow your market somewhat to cash purchasers, or those whom are prepared to pay for the kitchen removal before actually completing (if lender is prepared to offer on the conditon mge is removed pre completion).

I do know there are sort of pop up/mini kitchen ranges which can be easily dismantled and aren't a permanent fitting, I think Ikea do something like this, or of course free standing units (although you have the plumming issues) if possible, I would utilise this rather than have a fully fitted stationary kitchen installed, as in all likely hood(even if your current lender surpringly agrees) it will have to be removed on sale (unless you have a cash pch), or any remortage application, as it takes the property from a single 1 family dwelling into a multi unit - which as I say won't be permitted on a residential mortgage.


Hope this helps

Holly x

PS - link to the sort of removeable kitchen set up I mean - http://www.elfinkitchens.co.uk/ - http://spacesavers.co.uk/mailer/MKN2/Space-Savers-Comrcl-Ktchns.pdf?utm_source=MKN6&utm_medium=email&utm_campaign=st_mungos - just to give you an idea on options, if you google mini kitchen you'll find others.

football_widow

Hi Holly
hopefully re-selling of the property is a long way off for us, but none of us know whats round the corner do we?

The kitchen in the annexe isn't huge, and has a door to the outside so if the time did came that we have to sell, I would hope that if it was necessary we would just need to remove the cooker and it could be classed as a utility room esp as there isn't a utility room in the main part of the house.

Thanks for all your advice.