In-laws want to gift sister-in-law house after selling BTL. Implications?

mistrihelen

My in-laws seem to have quite a complicated plan to give my sister-in-law a house, and I wanted to sort of sanity check it.
They are selling their mortgage-free home worth approx 500k, and also want to sell their interest-only mortgaged BTL that nevertheless now has about 175k equity in it.
Their plan is to move to a much cheaper location and buy one house for themselves there (350-400k), and buy one for my sister-in-law (SIL) in the same area - for approx 225k. She currently rents their BTL and pays them via housing benefit. I guess because of her benefits they can't just sell and give her cash, they would need to sell the BTL and then pass the money through the solicitor in the chain to buy the next house in her name.

Am I right in thinking there will be CGT to pay on the BTL sale? They are both pensioners now so I assume they will have most of their tax allowance free still. IHT would apply if anything happens to them in next seven years but they are currently in good health and the house they buy for SIL is likely to be under the threshold.

They say they're not in a rush, though have just gone on the market, so presumably, there would be stamp duty to pay on a new house for themselves, but potentially not on the new house for SIL if she is a first time buyer (actually I just thought, she did buy a flat about 20 years ago, but quickly sold it - will they know that?)?

dimbo61

There are so many issues in this idea.
Yes they will pay capital gains tax on the sale of the BTL property.
They each have £12,500 capital gains allowance so £25,000 joint.
What did they pay for the property call that A

What are they selling it for ? Call that B

So B - A plus £25,000 gives taxable profit which they pay tax on at 18/28%
How are they able to rent to Daughter and get housing benefits for the rent ?
Very complex and they need professional help from accountant and solicitor 

mistrihelen

They paid 156k in 2004 and a similar house is listed for 325k now. Interest-only so only equity is in the value going up (I may be phrasing that wrong).

I think if you let a house at a market rent through proper channels you can still get away with getting housing benefit from a child. You have to prove it's not a 'contrived tenancy' or something like that. Not saying I agree with it... 

I think it's complex too - they seem to think it's really simple, which is what I'm worried about. Then again, I hear most of this second-hand via my husband, so who knows. I tend to be the one who's willing to do the most research so thought I'd get the background on what they might need to do.

dimbo61

This needs careful tax planning.
Selling there main residence is fine but depending how long it takes to sell and cost of new property could mean paying stamp duty.
Have in laws got good pensions as they are going to lose rental income ?
How does hubby feel if his sister gets a Free house ?
Having said that giving away assets can reduce Inheritance tax if they live another 7 years.
Have they made wills with very clear instructions 

[Deleted User]

mistrihelen said:

My in-laws seem to have quite a complicated plan to give my sister-in-law a house, and I wanted to sort of sanity check it.
They are selling their mortgage-free home worth approx 500k, and also want to sell their interest-only mortgaged BTL that nevertheless now has about 175k equity in it.
Their plan is to move to a much cheaper location and buy one house for themselves there (350-400k), and buy one for my sister-in-law (SIL) in the same area - for approx 225k. She currently rents their BTL and pays them via housing benefit. I guess because of her benefits they can't just sell and give her cash, they would need to sell the BTL and then pass the money through the solicitor in the chain to buy the next house in her name.

Am I right in thinking there will be CGT to pay on the BTL sale? They are both pensioners now so I assume they will have most of their tax allowance free still. IHT would apply if anything happens to them in next seven years but they are currently in good health and the house they buy for SIL is likely to be under the threshold.

They say they're not in a rush, though have just gone on the market, so presumably, there would be stamp duty to pay on a new house for themselves, but potentially not on the new house for SIL if she is a first time buyer (actually I just thought, she did buy a flat about 20 years ago, but quickly sold it - will they know that?)?

What your in-laws want to do isn't really that complicated.  Yes there is CGT to consider when selling the BTL property but the rest of it is quite straight forward.  There will be the normal rate of SDLT to pay when your in-laws buy their new home and the purchase of SIL's property will incur SDLT as well because she has previously owned a property and therefore for the purposes of SDLT is no longer considered a FTB regardless of how long ago she last owned a property.

Money gifted in order to buy a home should not impact SIL's benefits although obviously she will no longer be entitled to housing benefit since she will be a home owner and not a tenant.

AdrianC

mistrihelen said:

My in-laws seem to have quite a complicated plan to give my sister-in-law a house, and I wanted to sort of sanity check it.
They are selling their mortgage-free home worth approx 500k, and also want to sell their interest-only mortgaged BTL that nevertheless now has about 175k equity in it.
Their plan is to move to a much cheaper location and buy one house for themselves there (350-400k), and buy one for my sister-in-law (SIL) in the same area - for approx 225k. She currently rents their BTL and pays them via housing benefit. I guess because of her benefits they can't just sell and give her cash, they would need to sell the BTL and then pass the money through the solicitor in the chain to buy the next house in her name.

Am I right in thinking there will be CGT to pay on the BTL sale? They are both pensioners now so I assume they will have most of their tax allowance free still. IHT would apply if anything happens to them in next seven years but they are currently in good health and the house they buy for SIL is likely to be under the threshold.

They say they're not in a rush, though have just gone on the market, so presumably, there would be stamp duty to pay on a new house for themselves, but potentially not on the new house for SIL if she is a first time buyer (actually I just thought, she did buy a flat about 20 years ago, but quickly sold it - will they know that?)?

Your inlaws own A and B now. A is their home.
They sell both A and B, and buy C (to be their home).
Yes, CGT may be liable on the sale of B - depending on how much capital gain it's made in their ownership.

They then want to gift the price of D to their daughter to buy it.
Will she have to pay SDLT on her purchase? Depends on the timing with the SDLT holiday.
No FTB incentives for her. She can lie on the SDLT return, but it's... ill-advised... to lie to the tax man.

Yes, they may have IHT and deprivation of assets issues arising from such a substantial gift.

I'm surprised they've managed to convince the benefits people that the tenancy is open-market enough to allow her to pay for it using benefits.

mistrihelen

dimbo61 said:

This needs careful tax planning.
Selling there main residence is fine but depending how long it takes to sell and cost of new property could mean paying stamp duty.
Have in laws got good pensions as they are going to lose rental income ?
How does hubby feel if his sister gets a Free house ?
Having said that giving away assets can reduce Inheritance tax if they live another 7 years.
Have they made wills with very clear instructions 

They've never had particularly strong careers (not criticising, but it's been a few jobs here and there) so can't imagine there's much - but I don't know. The whole point of the BTL was to have it as an investment/rental income so I do hope they've made plans to account for losing that.

Mixed feelings here. We are currently in a house chain ourselves and about to commit to a new 25-year mortgage. We never had any expectations of money but we're really penny-pinching here just so that we can get a somewhat nice small house instead of our ratty small house on the edge of town. But it's their money and SIL will have to live near them, in a town that I wouldn't choose, so I'm trying to think nice positive thoughts about it all and be helpful where I can.