Would this work for IHT purposes?

skillboy

My parents have several houses and want to reduce their assets for IHT purposes.

Could they do the following to reduce the value of their estate and also avoid CGT?

1. Give away their Principle Private Residence (PPR) to my sister and thus save on CGT.

2. Pay my sister the market rental rate so my parents can continue to live in it. My sister would pay income tax on this rent.

3. Live for more than 7 years.

Does anyone see any flaw to this plan?

macca1974

I think that in theory this could work from an IHT point of view as your parents would be paying a market rent which I believe avoids the "gift with reservation rules". Although as with anything IHT wise, best to get some professional advice.

The issue I would have with this course of action is that your parents will have given the property legally to your sister and there would be potential issues around that. To name a couple....

If your sister got into financial difficulty, the house would be her asset and the might have to be sold to pay her debts and your parents might have to move out.
If your sister is married then on divorce it could form part of any settlement and your parents might have to move out.
If your sister died, then the property forms part of her estate and could be left to somebody other than you parents. etc etc

Mojisola

skillboy wrote: »

1. Give away their Principle Private Residence (PPR) to my sister and thus save on CGT.

They wouldn't pay any CGT if they sold their principle residence so I don't understand this bit.

On the other hand, your sister may have to pay GCT when she eventually sells the property.

xylophone

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

Chapter and verse above.

skillboy

Thanks for the feedback.

When you say

"They wouldn't pay any CGT if they sold their principle residence.... On the other hand, your sister may have to pay GCT when she eventually sells the property."

Do you mean my sister may have to pay CGT if the value of the house increases from when she receives the gift and when she sells it?

For example, my parents gift their PPR to my sister on 1st June 2014, the market value of the house is £250,000. In Jan 2018 the house is worth £300,000 and my sister sells it. Does my sister have to pay CGT only on the £50,000 profit?

zygurat789

skillboy wrote: »

Thanks for the feedback.

When you say

"They wouldn't pay any CGT if they sold their principle residence.... On the other hand, your sister may have to pay GCT when she eventually sells the property."

Do you mean my sister may have to pay CGT if the value of the house increases from when she receives the gift and when she sells it?

For example, my parents gift their PPR to my sister on 1st June 2014, the market value of the house is £250,000. In Jan 2018 the house is worth £300,000 and my sister sells it. Does my sister have to pay CGT only on the £50,000 profit?

Your example is correct, the gift is not only the house but also its markert value at the time of the gift.
Your sister does not have to pay CGT on the £50,000, this is the gain and she may have her annual allowance, currently £11,000 available and she may be married and have put the house in joint names and have £22,000 annual allowance.
Beware, this is a transaction between related parties and, as such, HMRC have the right to alter the transactuiobn value if they deem it to be inaccurate, so wildly inflating the transaction value ciould land you in a load of trouble.

skillboy

thanks for the clarification.

Taking things a step further... my parents have several properties one of which was bought in 1973 (let's call this house 2) and has been rented out during that time except for between 1998 and 1994 when they lived in it.

If after giving away their current house to my sister, could my parents then assign house 2 as their PPR and move into it. Then wait say 12 months and then give it to my brother free of CGT?

zygurat789

skillboy wrote: »

thanks for the clarification.

Taking things a step further... my parents have several properties one of which was bought in 1973 (let's call this house 2) and has been rented out during that time except for between 1998 and 1994 when they lived in it.

If after giving away their current house to my sister, could my parents then assign house 2 as their PPR and move into it. Then wait say 12 months and then give it to my brother free of CGT?

The various stati of the property are time apportioned so you can never get rid of a rented period although its % of the total may deminish, if the overall value increases then the absolute figure may increase too.

You are clutching at straws. This situation has been around for a long time. The taxman's lawyers have seen ideas come and dealt with them accordingly. Your family obviously have a bit and to preserve this effectively it would be cost effective to seek proper professional advice which would probably save you money.

skillboy

Noted with thanks. I'll tell them to get proper professional advice!

Annie1960

And they should do a search for 'deprivation of assets' before they make any decision.

John_Pierpoint

If someone rents out their Principal Private Residence [PPR] there is normally an additional tax free allowance to be set against the eventual gain on disposal.
Letting Relief


The other big relief for landlords who have lived in one of their rental properties as their main home is lettings relief. This allows a landlord up to a maximum of £40,000 capital gain for letting their property. This relief is available for each person with an interest in a buy-to-let property so if it’s jointly owned; each of the owners would potentially benefit from a £40,000 reduction in their CGT liability.

http://www.property118.com/capital-gains-tax-relief-on-a-property-you-have-lived-in/