Buying an investment property with inherited cash - proving source of funds

VicShill

Hi everyone
Hopefully someone can help.  My husband recently inherited £100,000 from the sale of his grandparents' house.  This money came via his parents, and then to him.  We have decided to use this money to buy and do up a house.  We will buy cash for the full purchase price, so no mortgage. 
I have some questions:

• I know that we have to provide proof of the source of the funds, but how far back do we have to go?  Right back to the sale of his grandparents' house?  Or just to his parents?  
• Also, if we are using the money for the entire purchase price, does this fall under the same rules as a gifted deposit, i.e. there is not inheritance tax involved unless his parents die within 7 years?
• Finally, on looking for conveyancing quotes online, it often asks you to specify whether it's buy to let. We intend to sell the place on, but should we select 'buy to let' regardless, for the purposes of calculating the correct Stamp Duty for a second home?

Thanks in advance for any advice you have.
Victoria

davidmcn

VicShill said:

My husband recently inherited £100,000 from the sale of his grandparents' house.  This money came via his parents, and then to him.

Hold on - did he inherit then? Do you mean his parent(s) inherited it and are gifting it to him, or that your husband inherited it and his parent(s) were just acting as executors in the estate?

I know that we have to provide proof of the source of the funds, but how far back do we have to go?  Right back to the sale of his grandparents' house?  Or just to his parents?

Depends on the solicitor's policies and the timescales involved. There aren't standard answers so you'll need to find out from your solicitor.  

Also, if we are using the money for the entire purchase price, does this fall under the same rules as a gifted deposit, i.e. there is not inheritance tax involved unless his parents die within 7 years?

There's never inheritance tax due immediately on lifetime gifts. If it is a gift by parent(s) then yes it will be taken into account if they die within 7 years (though obviously if they keep the money then it's going to be part of their estate anyway). If grandparent(s) died within the past 2 years and your husband didn't in fact inherit from them, it can be tax-efficient to do a deed of variation of their estate to say that (for inheritance tax purposes) the money was going directly to your husband rather than via his parents.

on looking for conveyancing quotes online, it often asks you to specify whether it's buy to let. We intend to sell the place on, but should we select 'buy to let' regardless, for the purposes of calculating the correct Stamp Duty for a second home?

Assuming you own at least one other property and you're never moving into the new one, you'll be paying the additional property surcharge. Doesn't make a difference whether you let it out or not.

VicShill

davidmcn said:

VicShill said:

My husband recently inherited £100,000 from the sale of his grandparents' house.  This money came via his parents, and then to him.

Hold on - did he inherit then? Do you mean his parent(s) inherited it and are gifting it to him, or that your husband inherited it and his parent(s) were just acting as executors in the estate?

I know that we have to provide proof of the source of the funds, but how far back do we have to go?  Right back to the sale of his grandparents' house?  Or just to his parents?

Depends on the solicitor's policies and the timescales involved. There aren't standard answers so you'll need to find out from your solicitor.  

Also, if we are using the money for the entire purchase price, does this fall under the same rules as a gifted deposit, i.e. there is not inheritance tax involved unless his parents die within 7 years?

There's never inheritance tax due immediately on lifetime gifts. If it is a gift by parent(s) then yes it will be taken into account if they die within 7 years (though obviously if they keep the money then it's going to be part of their estate anyway). If grandparent(s) died within the past 2 years and your husband didn't in fact inherit from them, it can be tax-efficient to do a deed of variation of their estate to say that (for inheritance tax purposes) the money was going directly to your husband rather than via his parents.

on looking for conveyancing quotes online, it often asks you to specify whether it's buy to let. We intend to sell the place on, but should we select 'buy to let' regardless, for the purposes of calculating the correct Stamp Duty for a second home?

Assuming you own at least one other property and you're never moving into the new one, you'll be paying the additional property surcharge. Doesn't make a difference whether you let it out or not.

This is really useful, thank you.  The money has been gifted by his parents, specifically his dad, who inherited the money himself.  So no inheritance tax to pay upfront.  
Just a quick question (hopefully)... As far as I understand it, it is fine to make an offer without having instructed a solicitor beforehand.  Is this correct?  I have obviously got one in mind, but haven't actually committed to them yet.

Thanks.

davidmcn

VicShill said:

davidmcn said:

VicShill said:

My husband recently inherited £100,000 from the sale of his grandparents' house.  This money came via his parents, and then to him.

Hold on - did he inherit then? Do you mean his parent(s) inherited it and are gifting it to him, or that your husband inherited it and his parent(s) were just acting as executors in the estate?

I know that we have to provide proof of the source of the funds, but how far back do we have to go?  Right back to the sale of his grandparents' house?  Or just to his parents?

Depends on the solicitor's policies and the timescales involved. There aren't standard answers so you'll need to find out from your solicitor.  

Also, if we are using the money for the entire purchase price, does this fall under the same rules as a gifted deposit, i.e. there is not inheritance tax involved unless his parents die within 7 years?

There's never inheritance tax due immediately on lifetime gifts. If it is a gift by parent(s) then yes it will be taken into account if they die within 7 years (though obviously if they keep the money then it's going to be part of their estate anyway). If grandparent(s) died within the past 2 years and your husband didn't in fact inherit from them, it can be tax-efficient to do a deed of variation of their estate to say that (for inheritance tax purposes) the money was going directly to your husband rather than via his parents.

on looking for conveyancing quotes online, it often asks you to specify whether it's buy to let. We intend to sell the place on, but should we select 'buy to let' regardless, for the purposes of calculating the correct Stamp Duty for a second home?

Assuming you own at least one other property and you're never moving into the new one, you'll be paying the additional property surcharge. Doesn't make a difference whether you let it out or not.

As far as I understand it, it is fine to make an offer without having instructed a solicitor beforehand.  Is this correct?  I have obviously got one in mind, but haven't actually committed to them yet.

Yes, though there's no harm in setting the ball rolling with them in the meantime, as they'll have initial admin to do to set you up as a client etc (and you can check what they need on the money-laundering front).

VicShill

Great, thanks for your quick replies.  

getmore4less

Doing houses up to sell is a business 
Are you going to live in it. 

DairyQueen

It may be important that you understand the tax position.

Your OH hasn't inherited this money. As things stand this is dad's capital and dad is gifting it. It is therefore defined as a PET for IHT purposes (on dad's estate). If dad doesn't survive for 7 years after making the gift then this cash will fall back into his estate and be included within the IHT calculation. If dad has a sizeable estate then it may increase the IHT due.

To avoid this scenario, and if grandparent died within the last two years, it is worth considering a deed of variation on grandparent's estate. This requires all beneficiaries of the latter to agree that this £100k should pass directly from grandparent's estate to your OH. This has the effect of removing the cash from dad's estate thus no danger of IHT.

Also, as has been mentioned. You will have to pay the second home SDLT surcharge on any property that isn't your main residence. Doesn't matter what the use of the property - BTL, holiday home, whatever. 

Finally, be aware of potential for CGT. CGT will be payable (less annual allowance and some costs) when the second property is sold. A married couple may only nominate a single property as their main residence (CGT free) but are able to own the second property jointly - thus doubling the CGT allowance.

Flugelhorn

re the whether buy to let or not - that is probably related to the mortgage work that the conveyancer would have to do 

the stamp duty second property will be calculated by the conveyancer as part of the process 

getmore4less

DairyQueen said:

It may be important that you understand the tax position.

Your OH hasn't inherited this money. As things stand this is dad's capital and dad is gifting it. It is therefore defined as a PET for IHT purposes (on dad's estate). If dad doesn't survive for 7 years after making the gift then this cash will fall back into his estate and be included within the IHT calculation. If dad has a sizeable estate then it may increase the IHT due.

To avoid this scenario, and if grandparent died within the last two years, it is worth considering a deed of variation on grandparent's estate. This requires all beneficiaries of the latter to agree that this £100k should pass directly from grandparent's estate to your OH. This has the effect of removing the cash from dad's estate thus no danger of IHT.

Also, as has been mentioned. You will have to pay the second home SDLT surcharge on any property that isn't your main residence. Doesn't matter what the use of the property - BTL, holiday home, whatever. 

Finally, be aware of potential for CGT. CGT will be payable (less annual allowance and some costs) when the second property is sold. A married couple may only nominate a single property as their main residence (CGT free) but are able to own the second property jointly - thus doubling the CGT allowance.

That is incorrect, only the beneficiary effected(changing their share) need to agree to the DOV.
if it also effects the estate IHT then the administrator has to agree.

As a development  business there is the possibility of income tax rather than CGT.

GDB2222

It should definitely be classed as income for tax purposes.