Future Inheritance/Capital Gains Taxes

JBTISH

Monday 11th April 2022


Good morning all.

I have a question concerning advice and your thoughts for future Capital Gains and Inheritance Taxes.  I am one member of a family of three. My Mother, who is 78, will at some point in the future, try to buy a small property which she will live in as her remaining home for the foreseeable future. She is concerned about Taxes after her death and would like to understand what is the best way to legally avoid Inheritance Tax on her estate in relation to her property. Under UK law I am of the belief that were her two children named on the property at purchase, as One 3rd owners each, they would not be subject to Inheritance Tax upon her death. (1). Is this correct?  Considerations?

She is also reaching an age where she is starting to need a little more help and at some time, may need one of her children to live with her as their primary and sole residence. (2). Would living with her (Primary Residence) or not living with her (Secondary Residence) affect Inheritance Tax on her estate in any way? I foresee the property having a 2022 value or purchase price of no more than £350,000. Obviously this has small bearing on the value at the time of her passing but thought it may be of some relevance if anyone asked.

3. Is there anything in the above circumstances which she or her children should be aware of or consider as an alternative option?

Thank you

theoretica

How large in total is her estate likely to be?  Is she a widow who inherited from her husband?  If her total estate is less than £500k, or £1million if she is a widow, there may be no inheritance tax to pay.

If she gives away a property but continues to live in it then it will probably still be subject to inheritance tax - the tax people noticed that loop hole. And as you mention capital gains tax, the other owners may need to pay this on the increase in value of their share, as well as inheritance tax.  My understanding is that your suggestion may well result in more tax paid, not less.

Murdina

"Under UK law I am of the belief that were her two children named on the property at purchase, as One 3rd owners each, they would not be subject to Inheritance Tax upon her death."

When your mother dies, IHT will be based on the value of her estate at death PLUS any transfers in the previous 7 years (although there are some exemptions). If your mother buys a house and makes 2 of her children co owners then - unless they pay her the full market value at the time - that means she has made a transfer to each of them of 1/3rd of the value of the house at that moment in time. If she dies within 7 years that comes into her estate.

That's before you get into the complications around reservation of benefit and other complications. As theoretica says, your first step is to work out the value of your mother's estate. If it looks like it would have an IHT charge on death, your second step is to consult a good solicitor or tax adviser.

Keep_pedalling

If you mother’s net worth takes her estate into IHT territory then gifting part of all her home would be a dumb move as it would be treated as a gift with resignation of benefit so would never fall out of her estate. Far better to make gifts in the form of cash from excess savings.

Brie

Please also be aware that giving away property or other assets will be noted if she requires council funded care and that isn't subject to a 7 year limit.  If anyone who is her carer is living in her house and mother needs to go to a care home the house can be sold regardless to fund her care unless the carer is also over 60 in which case the council will put a lien on it.  

JBTISH

Brie said:

Please also be aware that giving away property or other assets will be noted if she requires council funded care and that isn't subject to a 7 year limit.  If anyone who is her carer is living in her house and mother needs to go to a care home the house can be sold regardless to fund her care unless the carer is also over 60 in which case the council will put a lien on it.  

Hi Brie

Thank you for the heads up. Two points definitely worth considering carefully. 

JBTISH

theoretica said:

How large in total is her estate likely to be?  Is she a widow who inherited from her husband?  If her total estate is less than £500k, or £1million if she is a widow, there may be no inheritance tax to pay.

Hi Theoretica 

Thanks for the reply.  At the moment the total value of her estate including property, Assets and Capitol would be no more than £400k but most likely around £360k. She will only own the house or flat she buys and have little or no savings and just her pension as income. I appreciate property value changes with time but for the moment it is purely an exercise in understanding and planning for good future decisions. 

If she were to put her children on the property deed but passed away within seven years and the property remained at a value of £350K what would be the resultant consequence for the two remaining owners, her children, they having no capital, assets and solely their annual income?

Thank you

Keep_pedalling

JBTISH said:

theoretica said:

How large in total is her estate likely to be?  Is she a widow who inherited from her husband?  If her total estate is less than £500k, or £1million if she is a widow, there may be no inheritance tax to pay.

Hi Theoretica 

Thanks for the reply.  At the moment the total value of her estate including property, Assets and Capitol would be no more than £400k but most likely around £360k. She will only own the house or flat she buys and have little or no savings and just her pension as income. I appreciate property value changes with time but for the moment it is purely an exercise in understanding and planning for good future decisions. 

If she were to put her children on the property deed but passed away within seven years and the property remained at a value of £350K what would be the resultant consequence for the two remaining owners, her children, they having no capital, assets and solely their annual income?

Thank you

You don’t say what her marital status is, but even if she is not a widow her estate will not be subject to IHT so she has no need of IHT planning and should not give away any part of her home.

As previously stated this would be a gift with reservation so the 7 year rule would not apply. CGT would apply to any increase in value between the date of the gift and the date it was eventually sold. 

The other issue is that if any of her children do not currently own their own home they would loose there first time buyer status.

You really should advise her that her estate will not pay IHT and that gifting her home would lead to a CGT liability rather than no tax.

JBTISH

Keep_pedalling said:

JBTISH said:

theoretica said:

How large in total is her estate likely to be?  Is she a widow who inherited from her husband?  If her total estate is less than £500k, or £1million if she is a widow, there may be no inheritance tax to pay.

Hi Theoretica 

Thanks for the reply.  At the moment the total value of her estate including property, Assets and Capitol would be no more than £400k but most likely around £360k. She will only own the house or flat she buys and have little or no savings and just her pension as income. I appreciate property value changes with time but for the moment it is purely an exercise in understanding and planning for good future decisions. 

If she were to put her children on the property deed but passed away within seven years and the property remained at a value of £350K what would be the resultant consequence for the two remaining owners, her children, they having no capital, assets and solely their annual income?

Thank you

You don’t say what her marital status is, but even if she is not a widow her estate will not be subject to IHT so she has no need of IHT planning and should not give away any part of her home.

As previously stated this would be a gift with reservation so the 7 year rule would not apply. CGT would apply to any increase in value between the date of the gift and the date it was eventually sold. 

The other issue is that if any of her children do not currently own their own home they would loose there first time buyer status.

You really should advise her that her estate will not pay IHT and that gifting her home would lead to a CGT liability rather than no tax.

Hi Keep Pedalling…

Thank you for your reply.  Her marital status is single/divorced. Her children loosing their first time buyer status would not be a worry or consideration. 

Would there be any future benefit (taking into account the negatives you have pointed out) in her children owning a share in her home?  What are the benefits of parents passing on property to children within their life time?

Thank you

theoretica

JBTISH said:

 

Would there be any future benefit (taking into account the negatives you have pointed out) in her children owning a share in her home? 

I can't think of any.

JBTISH said:

 

What are the benefits of parents passing on property to children within their life time?

None that I know of.

Keep_pedalling

theoretica said:

JBTISH said:

 

Would there be any future benefit (taking into account the negatives you have pointed out) in her children owning a share in her home? 

I can't think of any.

JBTISH said:

 

What are the benefits of parents passing on property to children within their life time?

None that I know of.

I second that, no upsides whatsoever.