Capital gains vs inheritance tax

Lucytalitha

I would really appreciate some guidance, my situation is not straight forward ( according to the financial advisor I recently met with who seemed baffled ) So if you can bear with the long question I'd be really grateful.
My parents own 2 properties, one they live in, and one they rent to me and my husband. We want to move so would like to sell the house and use the proceeds , my parents have been advised to gift the house to me, so that they pay capital gains tax now rather than me paying inheritance tax in the future.
Does this seem like the right way forwa

[Deleted User]

Lucytalitha said:

I would really appreciate some guidance, my situation is not straight forward ( according to the financial advisor I recently met with who seemed baffled ) So if you can bear with the long question I'd be really grateful.
My parents own 2 properties, one they live in, and one they rent to me and my husband. We want to move so would like to sell the house and use the proceeds , my parents have been advised to gift the house to me, so that they pay capital gains tax now rather than me paying inheritance tax in the future.
Does this seem like the right way forwa

What potentially is the value of their estate? 

One obvious benefit of gifting the house now (depending on your answer) is that it is more likely to be completed before 5th April when the capital gains annual exemption is reduced from 12300 to 6000.

Jeremy535897

The actual choice you express appears to be between:

• parents give you the house, you sell it, buy new house with the proceeds
• parents sell the house, buy the new house you want, rent it to you (which means they will incur the higher rate of stamp duty on the new house)

There is a third option, which is that parents sell the house, give you the proceeds net of tax, and you buy the new house with the proceeds. This overcomes two potential downsides of the first option (gift of house) above:

• parents have the means to pay the tax on the sale of the current house (if they give it to you, they still have to pay the tax)
• no valuation is required
• if you are first time buyers, any benefits for you are lost

There are advantages though from them giving you the property now (or before 5 April), as follows:

• they can ensure the completion of the gifted property takes place by 5 April 2023, so benefiting from the current annual exemption value of £12,300 each (assuming no other gains)
• they can avoid completing an online capital gains tax on residential return (and paying the tax) within 60 days of completion, so long as they file their self assessment tax returns within that period. That potentially defers the tax liability to 31 January 2024, and also removes the risk of using an estimated valuation in the online return that subsequently turns out to be too low

In theory, these advantages could happen if they sell the property to a third party by 5 April 2023, but that would be unlikely to be achievable, unless there is a cash rich buyer waiting in the wings.

As purdyoaten says, a lot depends on the value of their estates. A married couple has inheritance tax nil rate bands worth up to £1 million. There is no point in paying capital gains tax to avoid a non-existent inheritance tax liability. It also depends on their health, as their inheritance tax nil rate bands will be used by any non-exempt gifts made in the seven years before death (in which case capital gains tax on the disposal has been paid unnecessarily because they would get a capital gains tax free uplift if they owned it on death).

Finally, I assume that you don't formally pay rent to them? All that does is give them taxable income with no corresponding tax deduction for you.