Parents considering transfer house ownership to myself and sister

Frobisher451

My parents are both 71 years old and in good health.

To avoid inheritance tax after death they are considering transferring the ownership of their house to myself and my sister (we are both in our early 40's) 

My parents own their house outright having paid their mortgage off 20 years ago.

My sister owns a house with a 25 yrs mortgage. I own a property outright, paid for in cash. 

We all live in Scotland. 

Would my sister and I be seen as second home owners and pay higher tax even if my parents continued to live in the house? We obviously wouldn't charge them rent. Would we incur any costs having the ownership transferred to ourselves? 

Thanks for any advice given. 

Flugelhorn

No no no!

Unless your parents estate  is worth £1,000,000 it won't save IHT and anyway if they are still living there it would be a gift with reservation and hence not a gift at all.

Also consider if one of you has a marital breakup / goes bankrupt etc then the property would be part of your assets and your parents could be homeless

Keep_pedalling

Unless after gifting the property they then pay you full market rent, this will not help with IHT as it will be treated as a gift with reservation of benefit so the 7 year rule will not apply. It could also lead to the double whammy of adding capital gains tax in edition to IHT


What is their net worth? If the house is worth £350k or more then thy can leave you up to £1M before IHT becomes an issue. If that is the case they would be better making cash gifts rather than risking their security by giving their home. Away

It also does not avoid care costs as it would be treated as deliberate deprivation of assets.

user1977

Frobisher451 said:

To avoid inheritance tax after death they are considering transferring the ownership of their house to myself and my sister (we are both in our early 40's) 

As above, this is a terrible idea for various reasons, and won't save on Inheritance Tax anyway.

km1500

"It also does not avoid care costs as it would be treated as deliberate deprivation of assets"

... only if they claim means tested benefits

km1500

the house can be transferred easily to you and your sister with just the solicitor's costs
 There is no stamp duty on gifts.

If you parents continue to live in (now your) house, they can do but it won't reduce IHT. 

There are 2 ways round this:

1. your parents pay market rent to you both. You need to follow all laws regarding tenancies and pay tax on the income. This might work if you have little or no other income as each of you can receive £12500 income without paying tax ie a total rent of 25000 p.a.

Any increase in house value will be subject to cgt.

2. your parents leave it to one of you who then moves in as their main residence. Mum and dad can then stay without problem and the 7 year iht rule applies.

RAS

If your parents leave the property to you in their wills, then there is a potential £1m IHT allowance.

If they are worried about care costs, they need to talk to a solicitor who can advise whether they could sever the tenancy and leave their portion to their children, with a lifetime trust allowing the survivor to live there as long as they want. 

If they've got over £1m assets they need proper financial advice.

Otherwise a good lawyer used to Scottish family inheritance laws is all they need.

FreeBear

Keep_pedalling said: It could also lead to the double whammy of adding capital gains tax in edition to IHT

Coupled with the reduction in CGT allowances (from £12300 to £6K this year, then £3K next year), the CGT bill could be quite steep if/when you sell.

propertyrental

Google is terrible but 'duckduckgo' is your friend:

'Gift With Reservation' (if they remain in the property)
'Capital Gains Tax' (if you don't live there)
' Deprivation of assets' (if they need local authority-supported care in future)
'Income Tax' (if they rent the property and pay you rent)

Frobisher451

Thanks for all the advice so far.

If my parents set up a liferent trust would we, as their children who both own a property each, be considered second home owners? If so, what would the tax implications be if 1. my parents continued to live in that home until they moved into care or 2. my parents decided they wanted to move to a smaller property and my sister and I had to sell the house and buy another for them? 

macman

You still haven't told us the potential value of the estate.  So accordingly it's not clear if any IHT is even likely to be due on the death of the second parent.
If it is, and of valuel, then you need to take proper advice from an estate planning professional, not random advice from an internet forum.