Inheriting whole holiday home on Universal Credit

Adviceplease1

Thanks for additional comments. Just discovered both properties valued 2 weeks ago. Key:

A = Holiday cottage, value £225K, was £65k when Dad inherited it in 90s, difference £160k, spent £44k on improvements/solicitors etc.

B = My house (n/a)

C = Dad’s house, value £375k. 

·      I’m already maintaining 3 properties including the holiday one at a distance, we have local help.

·      Dad doesn’t want money from the holiday cottage, he’ll do whatever is best, There’s no profit.

·      Tax Accountant suggested Holdover Relief on CGT (pay later!).

·      Government calculator suggests CGT in the region of £27K.

·      IHT not payable if the person lives 7 years but it's pushing it, given he’s 81 so will calculate based on him living 5 more.

·      Can anyone calculate please the IHT payable if cottage is gifted now and he lives 5 years?

·      Care home fees will be capped at £86K this autumn, they’d come from Dad’s house C, but I’d probably move in and care for him myself. (I’m single, better schools there for my kids etc).

·      Dad’s said he could free up equity in house C if any of our houses need repairs or if we need to pay CGT now.

·      Trust ideas look v good thank you, could gift cottage direct to my kids maybe, we’ll look into this.

 My best case scenario is to keep the holiday cottage with no mortgage, keep my own house, and take out a second charge mortgage on Dad’s house, C. The rental income is v. high where he lives - £1800pm. My own financial advisor has said this is feasible. This’d generate income to put my kids through Uni whilst paying off taxes/care home fees on his house etc.

Thanks for clarification from Ice Queen on childcare – I understand better now. The fact I’d never be able to claim benefits again puts me off doing the transfer now too, in case I have periods of unemployment. Might be best to wait until Sep 2024 (both children in school). Then I can work F/T & be more flexible. 

There are lots of options here including some form of equity release/transfer from property C, trust funds, I’m checking gift with reservation etc.

Our Tax Accountant (Director), my own FA, and a solicitor will all be consulted before any decision. As I say, if anyone knows a good solicitor experienced in these matters, please feel free to PM their info.  Really big THANK YOU for all suggestions. 

theoretica

There are disadvantages (as well as advantages) to the kids getting the property directly.  They would lose first time buyer privileges (eg stamp duty); they would lose their own eligibility to means tested benefits if they need them; their tax affairs would get more complicated...

Can anyone calculate please the IHT payable if cottage is gifted now and he lives 5 years?

As I read it, there is no difference unless he lives for the full 7 years - the gift will use up 225k of his tax free allowance and as no IHT will be paid on this portion of his estate taper relief provides no benefit.  Of course, if he lives longer and spends enough equity that his total estate reduces, then there will be less IHT due.

His total estate looks like being about 600k - so 500k free of IHT, and 40k to pay.  With CGT at 27k on the negative side you seem to be talking about savings of 13k or about 2%.  You could get the same saving by your dad simply spending 33k over the next few years (he can give you 3k a year without IHT complications).  That might be worth considering as less hassle/more benefit to him of his money?

TELLIT01

Tell your father to leave the property as part of the estate as trying to do anything else will be detrimental to your finances in the short to medium term.  If he has concerns about Inheritance taxes, there must be a pretty big pot so people will still be well looked after.

Keep_pedalling

gbhxu said:

Put the holiday home in a family trust

https://www.moneyhelper.org.uk/en/family-and-care/death-and-bereavement/using-a-trust-to-cut-your-inheritance-tax

That offers no benefits over gifting to family, same CGT issue, same 7 year rule and potential higher taxation on disposal.

Keep_pedalling

Adviceplease1 said:

Thanks for additional comments. Just discovered both properties valued 2 weeks ago. Key:

A = Holiday cottage, value £225K, was £65k when Dad inherited it in 90s, difference £160k, spent £44k on improvements/solicitors etc.

Not all spend on improvements can be offset things like a replacement boiler and redecorating  would fall under general maintenance.

B = My house (n/a)

C = Dad’s house, value £375k. 

·      I’m already maintaining 3 properties including the holiday one at a distance, we have local help.

·      Dad doesn’t want money from the holiday cottage, he’ll do whatever is best, There’s no profit.

·      Tax Accountant suggested Holdover Relief on CGT (pay later!).

·      Government calculator suggests CGT in the region of £27K.

·      IHT not payable if the person lives 7 years but it's pushing it, given he’s 81 so will calculate based on him living 5 more.

·      Can anyone calculate please the IHT payable if cottage is gifted now and he lives 5 years?

There is no taper relief on gifts under the NRB so he would have to live 7 years to get any relief.

·      Care home fees will be capped at £86K this autumn, they’d come from Dad’s house C, but I’d probably move in and care for him myself. (I’m single, better schools there for my kids etc).

I will believe that when it actually happens but even when it does the ‘hotel’ part of the costs will still be self funded.

·      Dad’s said he could free up equity in house C if any of our houses need repairs or if we need to pay CGT now.

·      Trust ideas look v good thank you, could gift cottage direct to my kids maybe, we’ll look into this.

No, it is probable a terrible idea 

 My best case scenario is to keep the holiday cottage with no mortgage, keep my own house, and take out a second charge mortgage on Dad’s house, C. The rental income is v. high where he lives - £1800pm. My own financial advisor has said this is feasible. This’d generate income to put my kids through Uni whilst paying off taxes/care home fees on his house etc.

Thanks for clarification from Ice Queen on childcare – I understand better now. The fact I’d never be able to claim benefits again puts me off doing the transfer now too, in case I have periods of unemployment. Might be best to wait until Sep 2024 (both children in school). Then I can work F/T & be more flexible. 

There are lots of options here including some form of equity release/transfer from property C, trust funds, I’m checking gift with reservation etc.

Our Tax Accountant (Director), my own FA, and a solicitor will all be consulted before any decision. As I say, if anyone knows a good solicitor experienced in these matters, please feel free to PM their info.  Really big THANK YOU for all suggestions. 

Is your father a widower? If so his estate would benefit from the transferable NRBs from his wife’s estate so would not be subject to IHT and none of this will be necessary.  

Keep_pedalling

A couple of other considerations.

Making your children part owners of the cottage (or beneficiaries of a trust set up to hold the house) is going to have major implications if they are not already homeowners as they will loose their first time buyer status on top of which they will pay an extra 3% stamp duty on their first purchase.

I also think you father’s main problem is not IHT but being asset rich and cash poor. Holding on to a property for sentimental reasons is rarely a good thing and he would be better off to sell up pay the CGT and have a far more comfortable old age. 

Alice_Holt

Keep_pedalling said:

Adviceplease1 said:

Thanks for additional comments. Just discovered both properties valued 2 weeks ago. Key:

A = Holiday cottage, value £225K, was £65k when Dad inherited it in 90s, difference £160k, spent £44k on improvements/solicitors etc.

Not all spend on improvements can be offset things like a replacement boiler and redecorating  would fall under general maintenance.

B = My house (n/a)

C = Dad’s house, value £375k. 

·      I’m already maintaining 3 properties including the holiday one at a distance, we have local help.

·      Dad doesn’t want money from the holiday cottage, he’ll do whatever is best, There’s no profit.

·      Tax Accountant suggested Holdover Relief on CGT (pay later!).

·      Government calculator suggests CGT in the region of £27K.

·      IHT not payable if the person lives 7 years but it's pushing it, given he’s 81 so will calculate based on him living 5 more.

·      Can anyone calculate please the IHT payable if cottage is gifted now and he lives 5 years?

There is no taper relief on gifts under the NRB so he would have to live 7 years to get any relief.

·      Care home fees will be capped at £86K this autumn, they’d come from Dad’s house C, but I’d probably move in and care for him myself. (I’m single, better schools there for my kids etc).

I will believe that when it actually happens but even when it does the ‘hotel’ part of the costs will still be self funded.

·      Dad’s said he could free up equity in house C if any of our houses need repairs or if we need to pay CGT now.

·      Trust ideas look v good thank you, could gift cottage direct to my kids maybe, we’ll look into this.

No, it is probable a terrible idea 

 My best case scenario is to keep the holiday cottage with no mortgage, keep my own house, and take out a second charge mortgage on Dad’s house, C. The rental income is v. high where he lives - £1800pm. My own financial advisor has said this is feasible. This’d generate income to put my kids through Uni whilst paying off taxes/care home fees on his house etc.

Thanks for clarification from Ice Queen on childcare – I understand better now. The fact I’d never be able to claim benefits again puts me off doing the transfer now too, in case I have periods of unemployment. Might be best to wait until Sep 2024 (both children in school). Then I can work F/T & be more flexible. 

There are lots of options here including some form of equity release/transfer from property C, trust funds, I’m checking gift with reservation etc.

Our Tax Accountant (Director), my own FA, and a solicitor will all be consulted before any decision. As I say, if anyone knows a good solicitor experienced in these matters, please feel free to PM their info.  Really big THANK YOU for all suggestions. 

Is your father a widower? If so his estate would benefit from the transferable NRBs from his wife’s estate so would not be subject to IHT and none of this will be necessary.  

      Good point.

      I'm not sure about the use of holdover CGT relief, as this is usually employed when passing a going business / business assets / business shares onto the next generation - and comes with conditions attached.  I have no practical experience, but wonder if HMRC would readily accept it when dealing with a property (esp. with seemingly limited rental income).  The OP may wish to satisfy herself that this won't lead to further complications.  

  On care costs, not only doesn't the proposed £86k social care cap cover the "hotel" costs, neither (apparently) does it cover the excess paid by the individual for care costs above the going Local Authority rate.  So it's inevitable that a great deal more than £86k can be spent before (and IF) it's capped.  Monevator did an excellent set of articles on care costs, some months back - it's a hugely complicated issue.
https://monevator.com/care-home-costs/

diggingdude

I'm glad someone mentioned the potential impact on the kids. Just sell it, in the long run you would all benefit that way 

Adviceplease1

Wow, thanks so much everyone for the additional advice. Clearly a lot to think about. I'm going to make a document and put all your info in there ready to ask our accountants and solicitor etc, for various scenarios.

Good that you've all pointed out the detrimental effect on the kids of leaving them property now - we hadn't considered this and it's obviously very important. So not a good idea to leave them shares in any property!

It's me that wants to keep the holiday cottage, me that has the sentimental attachment to it!  It's now registered as a business (furnished holiday let); we've had to let it close to cost price to achieve the required number of days.  But it does now break even.  Anyway, I'll ask the tax accountants more about this suggestion of theirs for holdover relief.

I'm thinking, another way around this might be for him to simply release equity in his main house, which he'd quite like to do anyway, but if I want to get a second charge mortgage on it later, to rent it out, I'll have to ask my FA what the minimum amount is that needs to be left in it. He could maybe put a chunk of this released equity on my own mortgage?  I'll check this out - now doesn't seem to be a good time with interest rates etc.

The care costs thing is a minefield - I'll absolutely check all that carefully too, thanks so much.  As I say, I'll probably just move in and care for him myself as long as possible. But he might need specialised help towards the end.  His Mum lived to 97 with many years of dementia - he could well be the same.  The link is v helpful for calculations.

Asset rich/cash poor hits the nail on the head.  Yep!

elsien

Adviceplease1 said:

Thanks for additional comments. Just discovered both properties valued 2 weeks ago. Key:

A = Holiday cottage, value £225K, was £65k when Dad inherited it in 90s, difference £160k, spent £44k on improvements/solicitors etc.

B = My house (n/a)

C = Dad’s house, value £375k. 

·      I’m already maintaining 3 properties including the holiday one at a distance, we have local help.

·      Dad doesn’t want money from the holiday cottage, he’ll do whatever is best, There’s no profit.

·      Tax Accountant suggested Holdover Relief on CGT (pay later!).

·      Government calculator suggests CGT in the region of £27K.

·      IHT not payable if the person lives 7 years but it's pushing it, given he’s 81 so will calculate based on him living 5 more.

·      Can anyone calculate please the IHT payable if cottage is gifted now and he lives 5 years?

·      Care home fees will be capped at £86K this autumn, they’d come from Dad’s house C, but I’d probably move in and care for him myself. (I’m single, better schools there for my kids etc).

·      Dad’s said he could free up equity in house C if any of our houses need repairs or if we need to pay CGT now.

·      Trust ideas look v good thank you, could gift cottage direct to my kids maybe, we’ll look into this.

 My best case scenario is to keep the holiday cottage with no mortgage, keep my own house, and take out a second charge mortgage on Dad’s house, C. The rental income is v. high where he lives - £1800pm. My own financial advisor has said this is feasible. This’d generate income to put my kids through Uni whilst paying off taxes/care home fees on his house etc.

Thanks for clarification from Ice Queen on childcare – I understand better now. The fact I’d never be able to claim benefits again puts me off doing the transfer now too, in case I have periods of unemployment. Might be best to wait until Sep 2024 (both children in school). Then I can work F/T & be more flexible. 

There are lots of options here including some form of equity release/transfer from property C, trust funds, I’m checking gift with reservation etc.

Our Tax Accountant (Director), my own FA, and a solicitor will all be consulted before any decision. As I say, if anyone knows a good solicitor experienced in these matters, please feel free to PM their info.  Really big THANK YOU for all suggestions. 

You are wrong about the care home fees side of things if that forms part of your plans.
 Firstly it’s not coming in yet it’s been delayed for at least two years. Which could mean a lot longer. . And secondly the cap is only on the care aspect. The “hotel“ costs such as food and utilities would be payable on top of the cap. These were flagged as  being about £200 but given what costs are at the moment that is completely unrealistic. Although as it’s not happening anyway it’s also academic.

and although it may well never happen, one person caring with someone with dementia who has behaviour changes and who may have day and night reversed can be next to impossible. My grandmother had to go into a care home, not because she was losing her marbles, but because she lost both her sight and her mobility and needed two people to move around safely.