Pre-owned asset tax on transfer of house?

Throwaway212

Hi, My parents have given me a rather large deposit (as a gift with no strings attached of course), which will account for 80% of the property value. I plan to move in and then after I have paid off the mortgage, transfer the property to my parents and move out, while my parents move in. Now since it will be my main address at the time of transfer, I am not liable for capital gains tax under private residential relief. However, will my parents have to pay pre-owned asset tax when they move in? There names will be on the deed.

Note - The property is well under the £500k (or £1 million for joint) IHT threshold so IHT is not something we have to worry about really. Also I'm aware of gift with reservation of benefit but since I will move out I don't think that'll apply to me. Also if there is a risk of any other taxable event I am not aware of please do let me know.

Keep_pedalling

Sounds mad, and I have to ask why do this?

This could lead to a large IHT bill if either of your parents die within 7 years and you have already gifted the property back to them. The gift stays in their estate for 7 years, and if you gift it back within 7 years it will double count for the remainder of the 7 years.

No good claiming it was really a loan when you declared it was a gift on your mortgage application.

Throwaway212

Keep_pedalling said:

Sounds mad, and I have to ask why do this?

This could lead to a large IHT bill if either of your parents die within 7 years and you have already gifted the property back to them. The gift stays in their estate for 7 years, and if you gift it back within 7 years it will double count for the remainder of the 7 years.

No good claiming it was really a loan when you declared it was a gift on your mortgage application.

Appreciate the response but I'm only looking to know if it will incur private asset tax or not. Again, the property is worth much lower than the £500K threshold for one person, or £1 Million should both parents go on the deeds. So there is no IHT concern here for us.

Keep_pedalling

When you say private asset tax do you mean capital gains tax? 

Throwaway212

Keep_pedalling said:

When you say private asset tax do you mean capital gains tax? 

No there is a tax called pre-owned asset tax which I think was introduced in 2004-5 as an anti-IHT avoidance feature.

Jeremy535897

Inheritance tax is based on the total estate of the deceased. If they owned other assets worth, say, £1 million, and they died within 7 years of the gift to you, and after you gifted it back to them, and the property was worth £500,000, their estate for inheritance tax is £1.5 million, and £400,000 of the nil rate band was used on the gift to you, so at least £900,000 is then subject to inheritance tax on the second death. £400,000 has been double counted. There used to be an exemption for mutual gifts (sections 148 and 149 IHTA 1984), but this was repealed in 1986.

If all of this is a mere unenforceable intention, and after receiving the deposit as a gift you are free to keep the house you buy forever, or sell it and spend the proceeds on yourself, and your parents neither occupy it during your ownership nor derive any benefit from it, it is hard to see how your parents could be caught by the POAT or GWR rules. If there are no strings attached to your subsequent gift of the property to your parents, and you neither occupy it nor derive any benefit from it in the future, similarly it is hard to see why the GWR or POAT rules apply to you either. As has already been pointed out, the transactions potentially increase inheritance tax voluntarily, so it's hard to see why there would be further tax problems. You might expect some questions regarding these transactions from solicitors fulfilling their money laundering obligations.

Throwaway212

Jeremy535897 said:

Inheritance tax is based on the total estate of the deceased. If they owned other assets worth, say, £1 million, and they died within 7 years of the gift to you, and after you gifted it back to them, and the property was worth £500,000, their estate for inheritance tax is £1.5 million, and £400,000 of the nil rate band was used on the gift to you, so at least £900,000 is then subject to inheritance tax on the second death. £400,000 has been double counted. There used to be an exemption for mutual gifts (sections 148 and 149 IHTA 1984), but this was repealed in 1986.

If all of this is a mere unenforceable intention, and after receiving the deposit as a gift you are free to keep the house you buy forever, or sell it and spend the proceeds on yourself, and your parents neither occupy it during your ownership nor derive any benefit from it, it is hard to see how your parents could be caught by the POAT or GWR rules. If there are no strings attached to your subsequent gift of the property to your parents, and you neither occupy it nor derive any benefit from it in the future, similarly it is hard to see why the GWR or POAT rules apply to you either. As has already been pointed out, the transactions potentially increase inheritance tax voluntarily, so it's hard to see why there would be further tax problems. You might expect some questions regarding these transactions from solicitors fulfilling their money laundering obligations.

Thanks for the clarification!

Keep_pedalling

Have you thought about what happens in the case of you coming to an unfortunate early demise before your parents.