IHT on House Deposit

JimmyJames1976

Hi all,
Apologies for opening another post on a subject that may have been covered, but my situation is slightly different to all of them, and all the other similar threads are closed!

When we bought our house in 2009 my father in law very kindly lent us £25k for a deposit. He and his wife were set up as a second charge against the mortgage.

Now that we are in the process of re-mortgaging, the issue of the second charge has come up, and we need to pay a sum of money to get it postponed and set up against the new mortgage.

Since setting the agreement up, we have been advised by my wifes father that we are no longer required to pay the money back. Effectively the money has now been gifted to us, although this has not yet been made official.

There are concerns around Inheritence Tax implications if the money becomes a gift.

Am I correct in saying that IHT implications only come into effect if the father in law (and his wife) die within 7 years of providing the money?
Assuming yes, does that 7 years start from when he initially provided it, or from now?
What would happen if the second charge was in place and he were to pass away?

To date we have not been required to pay any of the money back.

Are there any other things we need to consider when deciding how best to proceed? It is a difficult situation to discuss due to the inclusion of morbidity in the considerations, so I would rather have a well informed (and hopefully one-off) discussion about it with the parties involved! Understandably, and re-assuringly, my Father in Law is keen to avoid creating issues and problems in the future, so we want to make sure we do the right thing.

Hopefully this is in the right forum.

Thanks in Advance
James

Mojisola

JimmyJames1976 wrote: »

Since setting the agreement up, we have been advised by my wifes father that we are no longer required to pay the money back. Effectively the money has now been gifted to us, although this has not yet been made official.

There are concerns around Inheritence Tax implications if the money becomes a gift.

Am I correct in saying that IHT implications only come into effect if the father in law (and his wife) die within 7 years of providing the money?

If your wife's parents are married, they will need an estate of over £650,000 before any inheritance tax has to be paid.

If they do have more than that then the IHT rules will come into play but it will be the estate that pays the tax, not you and your wife.

If they put it in writing now that the loan has now become a gift, then the 7 year rule will come into effect from now.

CLAPTON

JimmyJames1976 wrote: »

Hi all,
Apologies for opening another post on a subject that may have been covered, but my situation is slightly different to all of them, and all the other similar threads are closed!

When we bought our house in 2009 my father in law very kindly lent us £25k for a deposit. He and his wife were set up as a second charge against the mortgage.

Now that we are in the process of re-mortgaging, the issue of the second charge has come up, and we need to pay a sum of money to get it postponed and set up against the new mortgage.

Since setting the agreement up, we have been advised by my wifes father that we are no longer required to pay the money back. Effectively the money has now been gifted to us, although this has not yet been made official.

There are concerns around Inheritence Tax implications if the money becomes a gift.

Am I correct in saying that IHT implications only come into effect if the father in law (and his wife) die within 7 years of providing the money?
Assuming yes, does that 7 years start from when he initially provided it, or from now?
What would happen if the second charge was in place and he were to pass away?

To date we have not been required to pay any of the money back.

Are there any other things we need to consider when deciding how best to proceed? It is a difficult situation to discuss due to the inclusion of morbidity in the considerations, so I would rather have a well informed (and hopefully one-off) discussion about it with the parties involved! Understandably, and re-assuringly, my Father in Law is keen to avoid creating issues and problems in the future, so we want to make sure we do the right thing.

Hopefully this is in the right forum.

Thanks in Advance
James

The gift will be subject to the 7 year rule in the normal way, so if he dies in the 7 year period and his total estate is over the IHT level then the estate would pay the relevant tax.
Of course if he left the estate to his wife then there would be no tax to pay.

The seven years would start from the date of the gift i.e. now approximately.


Of course, if he doesn't gift the money to you then the value of the loan would anyway form part of his estate, so in practice the liability is already there and making it a gift effectively reduces the liability after 7 years.

JimmyJames1976

Thanks, some good points. Particularly:

CLAPTON wrote: »

Of course, if he doesn't gift the money to you then the value of the loan would anyway form part of his estate, so in practice the liability is already there and making it a gift effectively reduces the liability after 7 years.

This in some ways makes the decision much easier. I believe my IFA had explained it to me but I didn't 'get it' until I read your explanation.

I will pass this on!

TrickyDicky101

Has either of the parents made any gifts in the current tax year and the last one? Is the charge registered in both their names? You can gift up to £3k per person per year and not have it included in any IHT calculations (you can also use the preceding year's allowance if it was unused). That could mean you can remove a total of £12k from future consideration for IHT.