IHT Question - Gift with reservation of benefit

rickenbacker330

A quick question on whether a cash gift can be consired as a gift with reservation for IHT purposes.

In 2002 I bought a second property by the coast. A few months later my parents sold their property and moved into my seond property. This enabled them to release their equity, live somewhere nicer and has basically funded their retirement. When they sold their property they gave me £80k which I used to reduce the mortgage on the second property. They do not pay and have never paid rent to live in my second property.

My question: is the £80k still considered to be part of their estate? Is it considered as a gift with reservation of benefit. Or is considered as an outright gift and therefore, is not part of their estate as it was gifted more the 7 years ago? I can understand that if they'd gifted me their property it would be considered as a gift with reservation. But in this case, it's a separte property that I already owned. Any help much appreciated.

Keep_pedalling

I don’t believe this could be classed as such. The only downside to the arrangement will be the loss of their residential NRB if their net worth exceeds ££65k.

Jeremy535897

This is a difficult question, and the precise facts will be important to establish. It appears from your OP that there was no pre-existing arrangement in place, by which I mean:

• you did not buy the second property with a view to your parents living in it
• you did not need the £80,000 gift from your parents to finance the purchase of the property, although it has made it easier for you to finance it

On the face of it, the GWR rules are unlikely to apply as there is no gift of an asset, just cash. These transactions are more likely to be caught by the pre-owned asset (POAT) rules, which can impose an income tax liability. An election can be made to choose to treat the arrangements as a GWR instead, but the time limit has expired.

This is not an area I have any experience in. It may be that as the £80,000 was not required to purchase the property, the rules do not apply. The POAT rules were contained in the Finance Act 2004, but can affect continuing arrangements that originated prior to 2005. More detail is available , for example:
https://www.atkinsonsaulfairholm.co.uk/factsheets/capital-taxes/inheritance-tax-avoidance-pre-owned-assets
https://comanandco.co.uk/pre-owned-asset-tax

rickenbacker330

Thank you. I will do some research regarding POAT rules - I think I may get caught by this. 

Regarding the following points:

Jeremy535897 said:

• you did not buy the second property with a view to your parents living in it
• you did not need the £80,000 gift from your parents to finance the purchase of the property, although it has made it easier for you to finance it

(1) - the second property was bought by me with a view that my parents would eventually be able to live in it. As stated the intent was to enable them to release equity (£160k released when they sold their house but then £80 gifted to me). They had no other assets and no income apart from state pensions. There was certainly no IHT avoidance plan in our minds when this was done as they were well within any thresholds.
(2) - that's correct - I bought the property independently and was not dependent on the £80k although as you state it made the financing easier as I chose to use the £80k to reduce the mortgage. I could have equally have just deposited / invested the money elsewhere.

I'm hoping the tax implictions on this are not too horrific  This (albeit naive) act was a just a way of helping out my parents so that they could have a slightly more comfortable retirement. There's already been negative consequences in that I reckon my parents have missed out on various benefits / pension credits that they would have been entitled to had it not been for the released equity.

Jeremy535897

rickenbacker330 said:

Thank you. I will do some research regarding POAT rules - I think I may get caught by this. 

Regarding the following points:

Jeremy535897 said:

• you did not buy the second property with a view to your parents living in it
• you did not need the £80,000 gift from your parents to finance the purchase of the property, although it has made it easier for you to finance it

(1) - the second property was bought by me with a view that my parents would eventually be able to live in it. As stated the intent was to enable them to release equity (£160k released when they sold their house but then £80 gifted to me). They had no other assets and no income apart from state pensions. There was certainly no IHT avoidance plan in our minds when this was done as they were well within any thresholds.
(2) - that's correct - I bought the property independently and was not dependent on the £80k although as you state it made the financing easier as I chose to use the £80k to reduce the mortgage. I could have equally have just deposited / invested the money elsewhere.

I'm hoping the tax implictions on this are not too horrific  This (albeit naive) act was a just a way of helping out my parents so that they could have a slightly more comfortable retirement. There's already been negative consequences in that I reckon my parents have missed out on various benefits / pension credits that they would have been entitled to had it not been for the released equity.

I think you need to take specialised advice. If the POAT rules apply, there may be underdeclarations going back to 2005. It may however be that the de minimis £5,000 for the rules to apply is relevant.

Keep_pedalling

rickenbacker330 said:

Jeremy535897 said:

• you did not buy the second property with a view to your parents living in it
• you did not need the £80,000 gift from your parents to finance the purchase of the property, although it has made it easier for you to finance it

I'm hoping the tax implictions on this are not too horrific  This (albeit naive) act was a just a way of helping out my parents so that they could have a slightly more comfortable retirement. There's already been negative consequences in that I reckon my parents have missed out on various benefits / pension credits that they would have been entitled to had it not been for the released equity.

It sounds like your parents net worth is well below 2 x NRB even with £40k added to each estate, so regardless of whether the gift is still part of their estate or not there will be no IHT to pay.

rickenbacker330

Yes - I agree that even if the gift was to be treated as part of their estate it wouldn't attract IHT.

The de minimus exemption for POAT is interesting - looks like there's a £10k annual exemption for a married couple so I'd be very surprised if this exemption doesn't apply.