Part payment for FIL's house and gift to sibling tax implications 4 July at 6:08PM edited 6 July at 7:33PM in Cutting Tax 14 replies 222 views

Disjoint

Hi all -
We intend on buying my father in law's house once we sell our house this fall. We will give him enough cash for him to buy his own house, and will be liable to pay stamp on that part. The rest my FIL will gift us in house value - however, my wife has a sister and we don't want this to be unfair so whatever value he is gifting us we will have to somehow give to her sister. I see two scenarios:
1. Pay less than full value on the house and pay stamp duty on this, gift half of the value of the house gifted to us directly to the sister. Problem with this, given the 7 year rule if anything were to happen to my FIL we would have to pay inheritance tax on the value of the house that was gifted to us and we would be unfairly affected by this compared to my sister in law
2. Pay the full value of the house + 50% of the value of the house my FIL intended on gifting to us and he can then give this money directly to my sister in law. Problem with this, our stamp duty will be increased

Is there any other scenarios I am not considering that could make sense in this situation?
**EDIT**
Thank you all for the replies - for anyone for whom that would be relevant : here is the solution I will likely go with, subject on accountant's blessing:
FIL gifts to my wife "x" value of his house that he is selling to us so that we do not end up paying SLDT on x.
FIL buys a flat for "y" 
Will is amended so that x/y = z% will be entirely for my SIL as a portion of my FIL's flat; this means that in the future my SIL would get y*z + 0.5*(y-y*z)
This has the benefit of taking inflation, house price rise etc... into consideration
Risk for my SIL - if my FIL sells the flat he is buying at any point in his lifetime. While this cannot be documented due to SLDT on the day - there is an implicit understanding that if this where to happen I would have to make her whole in the future. This is still a risk that cannot be done away with.

Jeremy535897

One way to address this is for the value of the gift to be taken into account on allocating the residuary estate between your wife and her sister, although that means your wife gets the gift earlier, and father in law could change his mind.

getmore4less

Are you sure there will be a IHT issue many get it wrong thinking gifts get taxed when they don't. 

How much would the gifted portion be? 

Check the downsizing rules for residential nil rate band. 

If you give the sister money that is connected to the house transaction that counts as consideration SDLT would be due anyway. 

Disjoint

@getmore4less the gifted portion would be substantial £500k - that's why the stamp duty consideration on £250k is not negligible. We are also very fortunate in that there would be an IHT consideration in the future (I went through the unfortunate exercise with a lawyer when my MIL passed away last year). I can cross one of the scenarios I was considering with what you are saying in relation with the gifting from my pocket to my sister in law, thank you very much for your comment. It looks like @Jeremy535897 has the only good solution by altering the will to leave £250k extra in there for her - quite a simple solution really so thank you for that

Jeremy535897

Disjoint said:

@getmore4less the gifted portion would be substantial £500k - that's why the stamp duty consideration on £250k is not negligible. We are also very fortunate in that there would be an IHT consideration in the future (I went through the unfortunate exercise with a lawyer when my MIL passed away last year). I can cross one of the scenarios I was considering with what you are saying in relation with the gifting from my pocket to my sister in law, thank you very much for your comment. It looks like @Jeremy535897 has the only good solution by altering the will to leave £250k extra in there for her - quite a simple solution really so thank you for that

Even if father in law forgets to do it, when the time comes you can (under current rules anyway) vary his will to achieve the balance you want. Look up "hotchpot", which is the term used for my suggestion.

Grumpy_chap

If you manage this by adjusting the will so that the first £250k goes to the SIL, and depending upon how many years FIL might reasonably be expected to survive, there might be a need to consider an adjustment to the £250k figure depending on inflation.  I really have no idea whether such indices van be written into a will.  With current low inflation rates and if the timescale is unlikely to be that long, this might not be a concern, but if time and / or inflation grow the impact grows also.

Will there be any resentment from SIL in that you are gaining the benefit of this large sum now, and yet she has to wait?  What if SIL falls on hard times in the interim period but cannot receive the financial support until an undetermined future time, but you are perceived to have the funds (her funds) ahead of time?

It might be simpler if you paid for FIL's new house plus £250k (including the SDLT impact now) thus reducing the value of your gift now to £250k.  FIL will then have extra £250k in cash which he can gift now to SIL.  That seems fairer to all siblings.

Jeremy535897

Grumpy_chap said:

If you manage this by adjusting the will so that the first £250k goes to the SIL, and depending upon how many years FIL might reasonably be expected to survive, there might be a need to consider an adjustment to the £250k figure depending on inflation.  I really have no idea whether such indices van be written into a will.  With current low inflation rates and if the timescale is unlikely to be that long, this might not be a concern, but if time and / or inflation grow the impact grows also.

Will there be any resentment from SIL in that you are gaining the benefit of this large sum now, and yet she has to wait?  What if SIL falls on hard times in the interim period but cannot receive the financial support until an undetermined future time, but you are perceived to have the funds (her funds) ahead of time?

It might be simpler if you paid for FIL's new house plus £250k (including the SDLT impact now) thus reducing the value of your gift now to £250k.  FIL will then have extra £250k in cash which he can gift now to SIL.  That seems fairer to all siblings.

There is a risk of overcomplicating it. The calculation of the value of the gift will be an estimate, and could easily be wrong by more than some inflation formula. Advice may be needed to ensure the inheritance tax burden on death is fairly allocated.

getmore4less

Disjoint said:

@getmore4less the gifted portion would be substantial £500k - that's why the stamp duty consideration on £250k is not negligible. We are also very fortunate in that there would be an IHT consideration in the future (I went through the unfortunate exercise with a lawyer when my MIL passed away last year). I can cross one of the scenarios I was considering with what you are saying in relation with the gifting from my pocket to my sister in law, thank you very much for your comment. It looks like @Jeremy535897 has the only good solution by altering the will to leave £250k extra in there for her - quite a simple solution really so thank you for that

Whats the full picture and goal here as there may be other options to achieve the overriding goals 

Seems we have £1m house + £whatever and potentially  £1m nil rate band.

If one goal is to reduce IHT exposure  how much does the FIL need to keep in cash to buy a house and live does he need cash to support income?
if income is in excess then saving and increasing capital will not be desirable so there is potential for more gifting.

With this level of gifts you also have to watch out for preowned asset traps and the potential for the 14y trap on PETS if there has been previous or future giving away activity.

Although there are well establish ways to calculate future/current values is the sis likely to benefit more from the cash now than in the future so some solution would be desirable to get some cash flowing her way.
There is also the risk that the rest of the FIL estate evaporates and not  enough left  but sounds like you may have the resources to address any imbalance if needed

Any grandkids around or expected that gifts can skip a generation or  account for some of the current utility value.
 eg. you have a load of kids and need the house where as sis is still comfortable with what they have now for their crop of kids that will benefit later through the will
 
The general approach to wealth retention is
Assets down : into the hands of the ones that will live longer either direct or through trusts
Income up : those with the income capacity support the day to day living of themselves and those above(or sideways).

pensions traps one of your assets into producing income for yourself and stops the accumulation of wealth to go down a generation.

Grumpy_chap

Jeremy535897 said:

Advice may be needed to ensure the inheritance tax burden on death is fairly allocated.

My understanding is that when the time comes, the Executors are responsible for settling all external liabilities of the Estate as this gives the value of the Estate, then paying IHT and then dealing with specified bequests (which will include the £250k to SIL) before getting to the distribution of whatever balance there is.
The complexity will be, if after liabilities and IHT there is not £250k remaining to meet the obligation to SIL plus any other specified bequests.  (In this case, IHT may well not be payable on the Estate.)  How will SIL feel if OP has received £250k now, but there is now future £250k for SIL?  Will the OP pay over 50% of their advanced inheritance?

Another consideration in all of this is whether FIL will ever need nursing home care and the exchange of £1m house for £500k house is deemed deprivation of assets.

Looks like FIL really needs to get some independent advice for HIS situation.

Disjoint

Thank you all for your points. We will be getting a stamp of approval on all of this with his accountant - what you mention @Grumpy_chap is a very good point (trading house for nursing home). At the moment he is in great shape (which is also the reason why gifting today would make sense as he is likely to live much more than 7 years). 
After reading some of the comments, I realised I had completely forgotten about compounding... One way to address this is to give an explicit share of my FIL's future flat in the will 75% to my SIL and 25% to my wife for example - this way if markets do appreciate and inflation does kick in at some point it won't dilute her completely. 

getmore4less

Deprivation of assets is less of a worry,  people often forget the important bit...     Deliberate dep.......

There is clear intention the primary purpose of the transaction is IHT mitigation and there is no imminent health care requirements.

Don't forget if the transaction goes through at 1m,  £500k cash and £500k gift then there is a pending £1/2m to even things up not £1/4m

Plenty to think about. 

One issue is the numbers are big, this sort of "lets adjust it in the family" goes on a lot more than people realise at a smaller level where  the morals of a tax fiddle seem to get forgotten,  It is pretty easy to offload 10s of £k out of an estate in a year wiich would need serious investigation down the line to uncover, not so easy to slip a sister £1/4m