Reducing IHT by gifting house

ikorodu

Hello all,

I posted this in the house buying section but thought it may be more relevant here.

My parents owned their own home out right. They want to reduce the amount of IHT that's likely to be due when the time comes.

Around two years back my dad gifted his half of the house to my sister. Hence now the house is owned by my mum and sister.

Now mum is going to transfer her half to me so them me and sis will be joint owners.

At that point mum and dad will pay me and sis a market rate rent.

So questions:

Legally who will have to pay for upkeep? Can mum and dad or will me and sis have to pay?

What paperwork will be needed to prove that there is not a gift with reservation of benefit?

Will normal landlord rules apply like gas certs?

Are there any other things that we need to consider?

somethingcorporate

Deprivation of assets is a key consideration if they are ever to require care funded by the state.

What do you mean by "upkeep"? If you own the house as LLs and your parents as tenants then you will be responsible for ensuring it is habitable and all the requirements e.g. gas safety are met.

You really need to speak to a solicitor that is experienced in this area to make sure the things you do are water tight. Spending a couple of grand now could save potentially tens or hundreds of thousands if things were to unwind in a bad way (e.g. parents need care, council prove deprivation of assets and treat the transaction as it never took place).

Tread carefully because a simple mistake could be very costly.

le_loup

ikorodu wrote: »

Are there any other things that we need to consider?

Income Tax on the rent received.
Capital Gains Tax.

ikorodu

Thanks for the points so far.

Just thought, what happens in all for of us are tenants in common, each with a 25% share from an IHT point of view? Would the fact that mum and dad still own 25% each of the house effect the treatment of the gift for IHT purposes?

MoneyMission2015

What is the value of the property? It could be under the IHT threshold.


However, the things you need to be looking at are deprivation of assets, Capital Gains Tax for you & your sister if it isn't your main residence, Income Tax on any rent you receive. You will also be landlords so will have obligations under that too.


These are just a few I can think of purely from reading various threads on this site. There are many more knowledgeable posters who would have even more useful information for you.

purdyoaten

le_loup wrote: »

Income Tax on the rent received.
Capital Gains Tax.

And, obviously but needs to be said, the requirement to register for self-assessment and completion of returns each year (unless already so doing for other reasons)

Also, a formal independent valuation should be obtained at the time of the gifts to establish a base cost for future Capital Gains. This will assist in any challenge by HMRC who will obtain their own valuation in any case.

Daniel54

ikorodu wrote: »

Just thought, what happens in all for of us are tenants in common, each with a 25% share from an IHT point of view? Would the fact that mum and dad still own 25% each of the house effect the treatment of the gift for IHT purposes?

Then your parents become laible for Pre Owned Asset tax ( POAT).Explanation extracted from here
https://www4.friendslife.co.uk/doclib/ctst50.pdf

"POAT will apply to persons who continue to derive a benefit (other than for full consideration) from an asset that they formerly owned, or provided the funds to purchase.
Individuals caught by the POAT rules face an increased income tax liability unless they elect to have the value of the relevant property back in their estate for IHT purposes, unravel the arrangement or pay a fair market rent for use of the property."

How much over the married couple's nil rate IHT band of £650k is your parents' estate

ikorodu

Daniel54 wrote: »

How much over the married couple's nil rate IHT band of £650k is your parents' estate

I'd guess at £500k for the house with another £700k in investments

CLAPTON

ikorodu wrote: »

I'd guess at £500k for the house with another £700k in investments

if you get it wrong, then you may well pay the IHT on the house and also capital gains tax

martinsurrey

somethingcorporate wrote: »

Deprivation of assets is a key consideration if they are ever to require care funded by the state.

deprevation of assets is only an issue if the reason for the disposal is to avoid care costs. If the parents do not need care now, it is not an issue.

MoneyMission2015 wrote: »

However, the things you need to be looking at are deprivation of assets, Capital Gains Tax for you & your sister if it isn't your main residence, Income Tax on any rent you receive. You will also be landlords so will have obligations under that too.

Other than deprevation of assets, you are correct. The other risk factor is bankruptcy of you or your sister, the family house could be sold to cover your debts, putting your parents out on the streets (not literally, they have £700k of investments, but you get my point)

Daniel54 wrote: »

Then your parents become laible for Pre Owned Asset tax ( POAT).Explanation extracted from here
https://www4.friendslife.co.uk/doclib/ctst50.pdf

"POAT will apply to persons who continue to derive a benefit (other than for full consideration) from an asset that they formerly owned, or provided the funds to purchase.
Individuals caught by the POAT rules face an increased income tax liability unless they elect to have the value of the relevant property back in their estate for IHT purposes, unravel the arrangement or pay a fair market rent for use of the property."

How much over the married couple's nil rate IHT band of £650k is your parents' estate

OP has stated that the parents would pay a market rent to the siblings, so not relevant for this.

OP main concerns are, capital gains tax from the point of transfer,

income tax on rent from parents,

and legal obligations of being a landlord (main one being gas saftey, if they died in a CO accident and you hadnt done a gas saftey check you could be up for criminal charges). General maintenance could be done by Parents, nothing to stop tenants painting and decorating, BUT if you pay for it you can write it off aginst the income tax.

you also have the 7 year rule, so if your mother dies within 7 years of the transfer, part of the transfer price will be counted against her estate.

SeniorSam

The 7 year rule would not apply if a full market rent were being paid on the gift of the property. This does need to be a rent which is 'professionally' assessed and not just an approximation and it needs to be reviewed each year with full records being kept.