IHT and Gift with reservation of benefit

LokiOfNZ

So we're about to launch into combining households with the inlaws, partly for the lifestyle of having grandparents and grandchildren close together but also obviously partly for hopefully inheritance tax benefits. However we've just been reading about gifts with reservation of benefit (yes we already had financial advice but GROB wasn't mentioned before!).

The inlaws are selling / have sold their house completely for around £920k. The end result is that they will gift 300k to their son and 300k to their daughter (my wife). We are selling our house completely and will then use our 300k mortgage, 550k of equity and the new 300k gift to purchase a larger house for 1150k entirely in my wife and Is names, for my wife, our kids and the inlaws all to live in.

In actual fact in order to speed the process the inlaws are gifting my wife the 300k to pay out our current mortgage, which will then be ported to the new house and the inflaws will also gift an additional 850k from their savings towards the purchase price of the new house and then we will return that 850k once we sell our house, keeping the initial intended 300k gift (yes this is all already approved, mortgage porting, additional stamp duty accounted for, exchanging soon with completion before Christmas).

What we've now read about this GROB clause in gifting laws. Most examples and explanations online refer to gifting the parents home to the children while the parents continue to live it in rent free. However in our case the parents home is sold and gone and they're gifting some of the cash from it to us which will be used to purchase an entirely new house where we'll all live together obviously all living rent free, although the wife and I will be servicing the mortgage clearly.

They will also loan us further money to extend the house, creating another lounge, bedroom and bathroom in an annex area of the house for them. We've already discussed this with local planning who have stipulated any such annex must be wholely within the house and cannot form a separate dwelling, ie it specifically cannot be occupied separately and rented out.

So any advice or pointers would be appreciated. We'll clearly be going back to our financial advisor, but given we haven't heard of this until now perhaps other opinions would be valuable!
Obviously questions are, given they're not gifting a house but part of the cash from its sale, will GROB apply?
The parents will reside with us but given their occupied part can't be rented out by planning law would that point to them not deriving a benefit from the gift?
Since the gift part we're keeping was to pay out mortgage on a different property does GROB apply to this new property at all? Or does the fact we're then selling that other property in order to return their other larger temporary gift change how that kept gift would be considered?

Any comments appreciated!

SDLT_Geek

Rather than giving you an answer, I am going to give you another question for you to ask your financial adviser. It is whether “pre owned assets tax” applies. It is, I think, an income tax charge on deemed income where the reservation of benefit rules do not apply.

00ec25

SDLT geek is spot on, the money from parents is "invested" in something they do not own but continue to benefit from

textbook POAT scenario

also make sure your "financial adviser" is an expert in estate taxes, as a run of the mill IFA will not have come across that sort of in depth inheritance tax planning. You may be better off seeing a member of STEP rather than a glorified mortgage salesman
https://www.step.org/about-us

LokiOfNZ

Thanks guys for pointing out the POAT thing, it certainly seems like we'll be caught by that. So all in all might not be so good for IHT purposes.

The concern now is avoiding the POAT applying to that initial extra 850k gift used to purchase the property in lue of releasing the 850k (550k equity and 300k intended final gift) from our existing house. Effectively that 850k is a loan as we will return the gift once our house is sold but the bank wanted it termed as a gift given we haven't actually yet sold the existing house.
So would the POAT liability reduce as we return the initial 850k extra gift? In the end it would be; Yes we did use their gifted money to purchase a property they occupy but then we returned the gift (or all but the intended 300k) and thus the returned money reverts back into their estate for taxable IHT purposes. Hopefully that would be case?

The other bit I can't figure out is how much the POAT amount might be.
So if in the end they have gifted 300k out of the 1150k purchase price, ie 26%.
So the parents would be liable to pay income tax on 26% of the rental value of the whole property, correct?
If the whole property would rent for 3kpcm/36kpa the parents would then be liable to pay income tax on 26% of 36k = 9.36k, correct?
And then depending if they're higher or lower rate tax payers they may end up paying 9.36k x 40% or 20%, ie 3.74k or 1.87k, correct?
One bit I can't figure out is, given there are two parents, how does that tax payment get split between them? Surely they don't both pay the entire POAT amount as that would seem like double taxation? Is it a case of they pay half each as they're both half benefiting? Or can you move the liability to just one of them on the lower tax band (doesn't help if they're both on the same band, given they're both retired).
Certainly sharing the nearly 10k liability might seem like the ideal, given there's a minimum POAT amount of 5k, so they might avoid it as long as the liability is under 5k each? Or is that unlikely?

LokiOfNZ

Found the answer to the last question;
"if two people are equally chargeable to POA, each is entitled to a £5,000 limit so, for example, a married couple would not be liable if the annual rental value of the relevant property did not exceed £10,000,"