Passing on second home to my Son

Alexiev

My enquiry regards passing on my second home to my Son. 

to add some detail the house was bought by my parents in the 80s. When they died in the 2000s I had to pay inheritance tax on the property and assets when it passed to myself. I would now like to pass it on to him he has already been living in the house for over 1 year. He has paid for the home to be extended so as to make room for his children.

What would be the best way to pass this property on, would this be liable for CGT and can this be avoided if so?

Also I am wondering how best to pass on my main home to him which is worth more than my second home. My ex wife is still a joint tenant on this house as well

I am open to lots of different options to reduce any potential tax bill

Thanks

unforeseen

If your ex wife is joint tenant rather than tenant in common then you will need her agreement. If not forthcoming then the house becomes your ex wife's on your death. 
If your wife is joint tenant then why should she give that up? I would expect her to want 50% of the current value to agree to giving up any rights on it. 

tacpot12

If your ex-wife is still a joint tenant, you can't pass on your main house in your Will. It will pass automatically to her when you die and your Will cannot change this.  You would need to buy out her interest so that you are the sole owner before you can pass it onto your son. You might get her to agree to convert from being a joint tenant to being tenants-in-common, which means that you could leave half your main house to your son, but if they don't get on, this is going to cause them both real problems.

While your ex-wife is still a joint tenant (or if you become tenants-in-common), your estate for IHT  would include half the value of your main house and all of the second house. When/if you are the sole owner of the main house, it will include ALL the value of your main house.

Your IHT nil rate band will be £325,000 if you were to die during before 2027. You will have an additional nil rate amount of upto £175,000 if you can leave your main home to your son in your will. Note that if you have changed the ownership of your main residence to be tenants-in-common with your ex-wife, your additional nil rate amount will be £87,500 (half of £175,000) as the amount is apportioned between direct descendents (your son) and your ex-wife. (Note that in this case, your son is only receiving half the vale of the main house). 

My understanding is (and I'm not an expert so wait to see what others say) is that there will be no CGT for your son to pay on the second property that he inherits from you. It seems that he has occupied the second house as his main home from the time he moved in, so when he inherits it will already be his main residence and no CGT will be payable. The CGT that you might have owed had you sold the house is wiped out on your death. Your estate is not liable to pay any CGT, only IHT.

So the best way to pass on the second home is just to leave it to your son in your Will. Your will might be as simple as "I leave everything to my son". He will inherit the main house entirely if you are the sole owner at the time of death, or half the house if you still own the main house with your ex-wife at the time of death.

If your aim is to maximise what you pass onto your son, clearly your priority needs to be to sever the joint tenancy with your ex-wife.

If you were to gift the property to your son before your death, your son might save on IHT, but you would have to pay CGT on the amount that you were giving him AND you would have to survive for a further seven years to guarantee that he avoids paying any IHT. So clearly your health, life expectancy and financial ability to pay the CGT have to be taken into account, and you probably need a tax accountant to review the potential savings and costs to confirm that it really is worth it. You might also incur SDLT if there is a mortgage on the second property that you are still paying (and the mortgage company would have to agree to you gifting the house to your son). 

Keep_pedalling

unforeseen said:

If your ex wife is joint tenant rather than tenant in common then you will need her agreement. If not forthcoming then the house becomes your ex wife's on your death. 
If your wife is joint tenant then why should she give that up? I would expect her to want 50% of the current value to agree to giving up any rights on it. 

She would not have a choice, if either owner wishes to split the tenancy and convert to tenants in common they can do by serving notice of severance on the other owner and file a restriction with the land registry.

https://www.charcol.co.uk/guides/tenants-in-common/

https://www.gov.uk/government/publications/form-a-restriction-application-to-enter-sev

If the OP does not want his share to go to his ex wife on his death then he should do this, assuming there is not already some form of restriction in place from a divorce settlement.

Giving your home away in your lifetime is almost always a dumb thing to do. Unless the the OP can also afford to pay full market rent to continue living there it will be considered a gift with reservation of benefit by HMRC so will not fall out of his estate, so won’t reduce any IHT liability but could add a CGT burden on top which would be a double whammy.

It would almost certainly also fall fowl of the deliberate deprivation of assets rules should residential care be needed.

Keep_pedalling

You can’t avoid CGT on the transfer for your second home. Any CGT due will be based on the gain in market value from probate value on your father’s estate and the market value on the date of the gift, although the cost of extending the property is normally deductible from the gain.

The complication here is that you did not pay for the extension he did and I don’t know what impact that has, so I suggest you consult an accountant on this one.

You have not mentioned any other assets you own, but if your estate is likely to have a large IHT burden, then you should consider making gifts of liquid assets rather than the house you live in, which is something you should never do. Apart from existing assets do you have any significant excess income?

Alexiev

unforeseen said:

If your ex wife is joint tenant rather than tenant in common then you will need her agreement. If not forthcoming then the house becomes your ex wife's on your death. 
If your wife is joint tenant then why should she give that up? I would expect her to want 50% of the current value to agree to giving up any rights on it. 

Hi there, yes my ex wife is in full agreement about passing property on . I paid her off over the years but we just never got around to taking her name off the deed. Also wondered if it could be beneficial to keep it on

Alexiev

tacpot12 said:

If your ex-wife is still a joint tenant, you can't pass on your main house in your Will. It will pass automatically to her when you die and your Will cannot change this.  You would need to buy out her interest so that you are the sole owner before you can pass it onto your son. You might get her to agree to convert from being a joint tenant to being tenants-in-common, which means that you could leave half your main house to your son, but if they don't get on, this is going to cause them both real problems.

While your ex-wife is still a joint tenant (or if you become tenants-in-common), your estate for IHT  would include half the value of your main house and all of the second house. When/if you are the sole owner of the main house, it will include ALL the value of your main house.

Your IHT nil rate band will be £325,000 if you were to die during before 2027. You will have an additional nil rate amount of upto £175,000 if you can leave your main home to your son in your will. Note that if you have changed the ownership of your main residence to be tenants-in-common with your ex-wife, your additional nil rate amount will be £87,500 (half of £175,000) as the amount is apportioned between direct descendents (your son) and your ex-wife. (Note that in this case, your son is only receiving half the vale of the main house). 

My understanding is (and I'm not an expert so wait to see what others say) is that there will be no CGT for your son to pay on the second property that he inherits from you. It seems that he has occupied the second house as his main home from the time he moved in, so when he inherits it will already be his main residence and no CGT will be payable. The CGT that you might have owed had you sold the house is wiped out on your death. Your estate is not liable to pay any CGT, only IHT.

So the best way to pass on the second home is just to leave it to your son in your Will. Your will might be as simple as "I leave everything to my son". He will inherit the main house entirely if you are the sole owner at the time of death, or half the house if you still own the main house with your ex-wife at the time of death.

If your aim is to maximise what you pass onto your son, clearly your priority needs to be to sever the joint tenancy with your ex-wife.

If you were to gift the property to your son before your death, your son might save on IHT, but you would have to pay CGT on the amount that you were giving him AND you would have to survive for a further seven years to guarantee that he avoids paying any IHT. So clearly your health, life expectancy and financial ability to pay the CGT have to be taken into account, and you probably need a tax accountant to review the potential savings and costs to confirm that it really is worth it. You might also incur SDLT if there is a mortgage on the second property that you are still paying (and the mortgage company would have to agree to you gifting the house to your son). 

Could I become joint tenants with my son in the house he is living in , so it would go straight to him when I pass on?

I've read a bit about trusts and that this may be one solution.

Also remortgaging part of the house to reduce the tax burden.

I also looked briefly in to what MPs did to avoid CGT. Where I could declare the house my son is in as my main home then pass it onto him perhaps.

I get about 20k a year from my pensions.

A large CGT bill or IHT could potentially mean my son would have to sell one of the family homes when I pass on which is what I want to avoid as I have been sensible with spending though out the years and this seems very unfair

Here is a bit of a interesting idea I had. If I gifted my son my home and paid rent to him. Could he also pay rent to me in the house he is living in . Basically counter balancing each other my market rent would  probably a fair bit higher but I am okay with that.

Keep_pedalling

Alexiev said:

unforeseen said:

If your ex wife is joint tenant rather than tenant in common then you will need her agreement. If not forthcoming then the house becomes your ex wife's on your death. 
If your wife is joint tenant then why should she give that up? I would expect her to want 50% of the current value to agree to giving up any rights on it. 

Hi there, yes my ex wife is in full agreement about passing property on . I paid her off over the years but we just never got around to taking her name off the deed. Also wondered if it could be beneficial to keep it on

Leaving it as it is could really complicate things for your executors when one of you dies, and may give her a CGT problem if you every decided to sell so I would get that sorted. 

sheramber

Alexiev said:

tacpot12 said:

If your ex-wife is still a joint tenant, you can't pass on your main house in your Will. It will pass automatically to her when you die and your Will cannot change this.  You would need to buy out her interest so that you are the sole owner before you can pass it onto your son. You might get her to agree to convert from being a joint tenant to being tenants-in-common, which means that you could leave half your main house to your son, but if they don't get on, this is going to cause them both real problems.

While your ex-wife is still a joint tenant (or if you become tenants-in-common), your estate for IHT  would include half the value of your main house and all of the second house. When/if you are the sole owner of the main house, it will include ALL the value of your main house.

Your IHT nil rate band will be £325,000 if you were to die during before 2027. You will have an additional nil rate amount of upto £175,000 if you can leave your main home to your son in your will. Note that if you have changed the ownership of your main residence to be tenants-in-common with your ex-wife, your additional nil rate amount will be £87,500 (half of £175,000) as the amount is apportioned between direct descendents (your son) and your ex-wife. (Note that in this case, your son is only receiving half the vale of the main house). 

My understanding is (and I'm not an expert so wait to see what others say) is that there will be no CGT for your son to pay on the second property that he inherits from you. It seems that he has occupied the second house as his main home from the time he moved in, so when he inherits it will already be his main residence and no CGT will be payable. The CGT that you might have owed had you sold the house is wiped out on your death. Your estate is not liable to pay any CGT, only IHT.

So the best way to pass on the second home is just to leave it to your son in your Will. Your will might be as simple as "I leave everything to my son". He will inherit the main house entirely if you are the sole owner at the time of death, or half the house if you still own the main house with your ex-wife at the time of death.

If your aim is to maximise what you pass onto your son, clearly your priority needs to be to sever the joint tenancy with your ex-wife.

If you were to gift the property to your son before your death, your son might save on IHT, but you would have to pay CGT on the amount that you were giving him AND you would have to survive for a further seven years to guarantee that he avoids paying any IHT. So clearly your health, life expectancy and financial ability to pay the CGT have to be taken into account, and you probably need a tax accountant to review the potential savings and costs to confirm that it really is worth it. You might also incur SDLT if there is a mortgage on the second property that you are still paying (and the mortgage company would have to agree to you gifting the house to your son). 

Could I become joint tenants with my son in the house he is living in , so it would go straight to him when I pass on?

I've read a bit about trusts and that this may be one solution.

Also remortgaging part of the house to reduce the tax burden.

I also looked briefly in to what MPs did to avoid CGT. Where I could declare the house my son is in as my main home then pass it onto him perhaps.

I get about 20k a year from my pensions.

A large CGT bill or IHT could potentially mean my son would have to sell one of the family homes when I pass on which is what I want to avoid as I have been sensible with spending though out the years and this seems very unfair

Here is a bit of a interesting idea I had. If I gifted my son my home and paid rent to him. Could he also pay rent to me in the house he is living in . Basically counter balancing each other my market rent would  probably a fair bit higher but I am okay with that.

You both need to pay income tax on the rental  profit. You cannot claim your own rent paid as an expense.

Jeremy535897

You have to get the ownership correct immediately. If you die, the property owned as joint tenants all passes to your ex-wife.

getmore4less

@tacpot12

Note if you have changed the ownership of your main residence to be tenants-in-common with your ex-wife, your additional nil rate amount will be £87,500 (half of £175,000) as the amount is apportioned between direct descendents (your son) and your ex-wife. (Note that in this case, your son is only receiving half the vale of the main house). 

Love to know where that came from because it is not how the residential nil rate band works.

Ex wife is not a direct descendant

Everyone gets a FULL RNRB to apply to qualifying property(Inc down size) when they have qualifying decendents.