Can part ownership by a son reduce IHT on a property?

Kernel_Sanders

This is quite a simple one. When Dad died in 1985, Mum's money went into buying her first house for £35,000, but she was short of £14,000, which my brother and his wife provided. I believe their names are on the deeds as 40% owners (20%each). My mother is the only person who has lived in the property all this time, so when she dies, is there any 1980s scheme that could have been set up to ensure my brother and his wife are not deemed beneficial owners, and therefore assessable for IHT? He got quite annoyed when I suggested otherwise. Mum's estate will be well over £325,000 if the 40% share is assessable, the house being worth roughly £200,000.

kidmugsy

Your question is puzzling. It's only your mother's 60% that is part of her estate, not the other 40%. So of course there will be no IHT to pay on the 40%. There will be CGT on the 40% when they sell the house, of course, since it wasn't their principal private residence.

That's assuming that the three own the property as "tenants in common" rather than "joint tenants".

xylophone

It may be that for IHT purposes, your mother's estate will benefit from the spouse allowance.

Only the portion of the house owned by your mother counts as part of her estate - the 40% owned by your siblings does not.

It would seem that your siblings are beneficial owners of the 40% - if they had made your mother a loan so that she could buy the house, they would not be shown as tenants in common on the deeds?

If what you are thinking of is CGT

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/323679/hs283.pdf page 7

http://www.telegraph.co.uk/finance/property/advice/propertyclinic/7938823/The-tax-implications-of-buying-a-home-for-a-relative.html
might be of interest.

getmore4less

best bet is have the will changed so the brother/wife inherit the house to avoid future problems

Chances are there is upto £650k nil rate band anyway,

nothing worse than an ill informed sibling to cause family rifts over money

Savvy_Sue

Worth noting that if Dad left everything to Mum, then she has £650,000 available before IHT is due.

However, I think that only the 60% share of the house would fall into Mum's estate.

And it is always the estate which pays the IHT, not the survivors.

But when the house is sold, your brother and his wife will have to think about Capital Gains Tax if they have never lived in it, although again, possibly only the gain on their 20% share.

[STRIKE]I could be quite wrong about this, but I hope by giving a response that I'll be corrected.[/STRIKE] didn't see the earlier posts, looks like we're in agreement ...

Kernel_Sanders

xylophone wrote: »

Only the portion of the house owned by your mother counts as part of her estate - the 40% owned by your siblings does not.

http://www.telegraph.co.uk/finance/property/advice/propertyclinic/7938823/The-tax-implications-of-buying-a-home-for-a-relative.html
might be of interest.

The first statement appears to be at odds with this clause from the Telegraph link:
Can my parents give me their house and still live there for free?
No. I cannot emphasise enough that this results in the worst of all possible tax worlds. It is ineffective for IHT because of the reservation of benefit (living for free) and forms part of the parents' estates after all.

I don't think mother has paid them anything so has been living in their proportion of the house for free. Can't see how this arrangement is any different from being given 40% ownership.

CLAPTON

Kernel_Sanders wrote: »

The first statement appears to be at odds with this clause from the Telegraph link:
Can my parents give me their house and still live there for free?
No. I cannot emphasise enough that this results in the worst of all possible tax worlds. It is ineffective for IHT because of the reservation of benefit (living for free) and forms part of the parents' estates after all.

I don't think mother has paid them anything so has been living in their proportion of the house for free. Can't see how this arrangement is any different from being given 40% ownership.

your first post said they paid 14,000 for a share in the property: that is NOT a gift, it's a purchase

Keep_pedalling

Kernel_Sanders wrote: »

The first statement appears to be at odds with this clause from the Telegraph link:
Can my parents give me their house and still live there for free?
No. I cannot emphasise enough that this results in the worst of all possible tax worlds. It is ineffective for IHT because of the reservation of benefit (living for free) and forms part of the parents' estates after all.

I don't think mother has paid them anything so has been living in their proportion of the house for free. Can't see how this arrangement is any different from being given 40% ownership.

It is very different, the purchase of the house had not put anyone in a position where they are avoiding IHT. You mother has not given any of her assets away. Your brother and SIL have chosen not to charge your mum rent from their 20% which has simply deprived them of some potencial income which they don't need.

You mum's estate is well under the £650,000 threshold so no tax will need to be paid from the estate, you brother and SIL however face CTG on their £33,000 gains when the house is sold.

agrinnall

Kernel_Sanders wrote: »

is there any 1980s scheme that could have been set up to ensure my brother and his wife are not deemed beneficial owners,

Even if there was do you have a time machine that would allow you to go back and set one up? If not then it seems a rather pointless question.

Savvy_Sue

agrinnall wrote: »

Even if there was do you have a time machine that would allow you to go back and set one up? If not then it seems a rather pointless question.

I thought the OP was asking from a position of ignorance: they don't know what arrangements were made when this happened, and don't know what possibilities there were for arranging things to lessen future tax implications, and wondered if there were any since brother is adamant that whatever the OP is worried about is not an issue.

Of course, even if something highly tax efficient was done then, it may not still be tax efficient today.

Now, we don't know what arrangements were made then, and the only way the OP is going to find out is to ask: was a trust set up? what documents exist? but since brother wasn't particularly receptive to these enquiries the way forward might be to suggest that both mother and brother should review wills and do some tax planning, after taking professional advice, because things have changed since the '80s. However, brother may well take the view that these things are none of the OP's business, and that is true.

CLAPTON

Kernel_Sanders wrote: »

This is quite a simple one. When Dad died in 1985, Mum's money went into buying her first house for £35,000, but she was short of £14,000, which my brother and his wife provided. I believe their names are on the deeds as 40% owners (20%each). My mother is the only person who has lived in the property all this time, so when she dies, is there any 1980s scheme that could have been set up to ensure my brother and his wife are not deemed beneficial owners, and therefore assessable for IHT? He got quite annoyed when I suggested otherwise. Mum's estate will be well over £325,000 if the 40% share is assessable, the house being worth roughly £200,000.

with the limited info available the situation is

- 60% of the 200k is part of the mothers estate i.e. 120,000
-the mother's estate will have a 650,000 IHT allowance if the husband left everything to the wife (even if he actually had nothing atall to leave)


- if the house is subsequently sold there will be a cgt liability based on 20% and 20%

so gain 200,000 -35,000 = 165000 less selling cost say 3000
so gain now 162000

so 20% of 162,000 is 32,400
and cgt allowance is 11,100

so tax of 18% to 28% on 21,300 each ie. between 3,834 to 5,964 each