Grandma renting

DMartinJones

My first post here, thanks for accepting me.
Background:
Grandma (my MIL) sold her large house in October 2017 and was a 2/3 owner (my wife 1/3) following death of husband in 2010.  Grandma 'gave' almost all her 2/3 of money to my wife & I, and we placed it in our bank account.  The plan was that she should initially rent then 'buy' our current house off us & we use the monies from her former house to buy a bigger one (we have 3 small children).  We have struggled to find anything suitable until now & Grandma has remained renting. The house we have found (if they sell to us) will use most of our monies.
Question:
We are aware of the 7 year HMRC rule on the money that Grandma has given us.  Grandma now feels that she would rather live in the same property as us.  We are aware that if we buy a house using (some of) the money Grandma gave us & she lives there, then HMRC will look at it as though Grandma is a part owner & we will be subsequently taxed on her death & gain nothing from the 7 year gifting rule.  However, if we charge Grandma rent for living at the property at the going local rate then will that be ok at the time of her death as far as HMRC is concerned.  
My reasoning is that Grandma is currently paying rent to her landlady & HMRC will tax the landlady as Grandma's rent is seen as earnings for the landlady.  If Grandma stays with the landlady & dies less than 7 years after giving us her money then we have to pay tax.  Now if Grandma lives with us but is renting & I (or my wife) declare this rent as earnings & pay tax on it, then HMRC still gets its tax (from me now & not the landlady) & we still get clobbered if Grandma dies within 7 years.  However, the 7 year clock continues to tick as Grandma is paying at the local renting rate. 
Is my reasoning sound?
Martin

p.s. we are aware of the risk of Grandma's 'early' death, but if all else fails we could sell the 'new' house to release capital - its a risk.

tom9980

How much money is it?

[Deleted User]

DMartinJones said:

My first post here, thanks for accepting me.
Background:
Grandma (my MIL) sold her large house in October 2017 and was a 2/3 owner (my wife 1/3) following death of husband in 2010.  Grandma 'gave' almost all her 2/3 of money to my wife & I, and we placed it in our bank account.  The plan was that she should initially rent then 'buy' our current house off us & we use the monies from her former house to buy a bigger one (we have 3 small children).  We have struggled to find anything suitable until now & Grandma has remained renting. The house we have found (if they sell to us) will use most of our monies.
Question:
We are aware of the 7 year HMRC rule on the money that Grandma has given us.  Grandma now feels that she would rather live in the same property as us.  We are aware that if we buy a house using (some of) the money Grandma gave us & she lives there, then HMRC will look at it as though Grandma is a part owner & we will be subsequently taxed on her death & gain nothing from the 7 year gifting rule.  However, if we charge Grandma rent for living at the property at the going local rate then will that be ok at the time of her death as far as HMRC is concerned.  
My reasoning is that Grandma is currently paying rent to her landlady & HMRC will tax the landlady as Grandma's rent is seen as earnings for the landlady.  If Grandma stays with the landlady & dies less than 7 years after giving us her money then we have to pay tax.  Now if Grandma lives with us but is renting & I (or my wife) declare this rent as earnings & pay tax on it, then HMRC still gets its tax (from me now & not the landlady) & we still get clobbered if Grandma dies within 7 years.  However, the 7 year clock continues to tick as Grandma is paying at the local renting rate. 
Is my reasoning sound?
Martin

p.s. we are aware of the risk of Grandma's 'early' death, but if all else fails we could sell the 'new' house to release capital - its a risk.

Has grandma actually gifted you and your wife her share of the proceeds from selling her house or had she, for some bizarre reason, just asked you to look after the money for her? 

What does 'buy' your current home from you mean? Why is 'buy' in inverted commas? 

oldbikebloke

grandma's money bought the house you live in
that status will still apply to the next place you buy

you don't appear to be aware of the Pre Owned Asset Tax (POAT) rule?

Under that, if grandma does indeed live with you in s property her money has paid for and she does NOT pay you a Market rent, then she will be subject to income tax on the value of rent she is not paying. That rule designed to precisely address the scenario you think will get around the 7 year rule. She cannot evade IHT if she continues to benefit from her money in the form of rent free living in a house her money paid for.

xylophone

Surely Grandma should have a beneficial interest in the new property to the extent of the percentage of the purchase price she has provided? You. you wife and Grandma should be TIC?
This would avoid the POAT and be fair to Grandma?

DMartinJones

This money is a.....Potentially Exempt Transfer
'How much money is it?'...........over £325k
'Has grandma actually gifted you and your wife her share of the proceeds from selling her house or had she, for some bizarre reason, just asked you to look after the money for her?' ..........gifted.
'What does 'buy' your current home from you mean? Why is 'buy' in inverted commas?' ....doesn't matter as will not live there.
'Grandma's money bought the house you live'.....no, we own our current house.
'Pre Owned Asset Tax (POAT) rule'...this is my question:  I intend to charge her rent & pay tax on my earnings from it.  Should she live 7 years after gifting then should that be ok for HMRC, in that she rented in our house?

[Deleted User]

DMartinJones said:

This money is a.....Potentially Exempt Transfer
'How much money is it?'...........over £325k
'Has grandma actually gifted you and your wife her share of the proceeds from selling her house or had she, for some bizarre reason, just asked you to look after the money for her?' ..........gifted.
'What does 'buy' your current home from you mean? Why is 'buy' in inverted commas?' ....doesn't matter as will not live there.
'Grandma's money bought the house you live'.....no, we own our current house.
'Pre Owned Asset Tax (POAT) rule'...this is my question:  I intend to charge her rent & pay tax on my earnings from it.  Should she live 7 years after gifting then should that be ok for HMRC, in that she rented in our house?

It does matter if what grandma actually did was give you that money with the expectation she would end up owning the house you currently live in. 

silvercar

Can you look at it as:
1/ in October 2017 Grandma gifted you some money.
2/ since then she has rented elsewhere.
Thus establishing that the money was an outright gift and the clock started in October 2017.
Now you are going to buy a bigger home and sell your existing one. Presumably you will move in first and get the place sorted. You may then invite Grandma to live with you either permanently or temporary. You don't know what the future holds, Grandma may change her mind, she may have care issues. Either way having lived independently for nearly 3 years after gifting you the money may be enough to satisfy hmrc that the money was a true gift and therefore a PET.

xylophone

1/ in October 2017 Grandma gifted you some money.
2/ since then she has rented elsewhere.
Thus establishing that the money was an outright gift and the clock started in October 2017.

It wasn't a gift if Grandma thought that she would be buying the OP's home thus enabling him to move to a larger property?

DMartinJones

Please understand that Grandma (MIL) is on-board with it all.  She gifted her share 1st week November 2017 with no conditions & at that time we were looking at cheaper houses. With her (& my wife’s) money we became cash buyers - I initially thought that would help, but 3 years on I can say not.  The property we have now found would cause us to spend all Grandma gave us, my wife’s 1/3, our current property (which we fully own) & dip into savings too. Personally I think we are pushing ourselves, but my wife loves the house (Swansea) & grew up in her parents house (South London) & she wishes to spend the money on something to ‘replace’ her childhood home.  The crux of my initial question was that if Grandma pays a going rate of rent to us that we declare, would that not impact on the 7 year gifting rule for HMRC? (We need to factor in early death & tax bill & also should she hate living with us (though she has expressed this as ideal) then we get a nearby bungalow for her). 

xylophone

https://www.icpa.org.uk/portal/tax/poat_out_the_frying_pan_into_fire