lifetime leases and inheritance tax?

chilswelluk

The market rate for a lifetime lease is typically 50% of what you would pay if you were buying outright. Consider a situation where a son owns a second home worth 400k (mortgage free). He sells a lifetime lease to his mother for this property who is in her 80s for 200k. She then dies within 1 year of purchasing the lease. From a hypothetical situation, if the son had been the sole beneficiary of his mothers estate and if this 200k would have otherwise been subject to inheritance tax, the creation of this lease would benefit the son financially. This arrangement would be much more beneficial than if his mother had simply gifted him 200k, as a gift would have been subject to the 7 year rule. Am I missing something?

p00hsticks

chilswelluk said:

The market rate for a lifetime lease is typically 50% of what you would pay if you were buying outright. 

Is this still true if the person buying the lease is someone on their 80's who is expected to die in the next year ?

Keep_pedalling

I am pretty sure HMRC would see this as a tax avoidance scheme. £200k for a a lease that is almost certainly going to be a very short one is nothing other than a contrivance. 

If the parent was 60 and in good health and was going to be using it for their home would probably a goer.

There is also the issue that any lease you sell will be subject to CGT.

Jeremy535897

Keep_pedalling said:

I am pretty sure HMRC would see this as a tax avoidance scheme. £200k for a a lease that is almost certainly going to be a very short one is nothing other than a contrivance. 

If the parent was 60 and in good health and was going to be using it for their home would probably a goer.

There is also the issue that any lease you sell will be subject to CGT.

The lease premium might be subject to income tax, at least in part. See:
https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1205

chilswelluk

Keep_pedalling said:

I am pretty sure HMRC would see this as a tax avoidance scheme. £200k for a a lease that is almost certainly going to be a very short one is nothing other than a contrivance. 

If the parent was 60 and in good health and was going to be using it for their home would probably a goer.

There is also the issue that any lease you sell will be subject to CGT.

The prospect of capital gains tax is not such an issue as it is much lower than the 40% inheritance tax.  Secondly, at the point of creating the lease, nobody knows for sure how long the mother could live.  Its unlikely, but not impossible that she could live to over a 100.  Secondly, if there is an investigation, she will not be able to give any evidence as she will be dead.

Thirdly, there may be very good reasons why she would buy this lease.  What about if she wanted to move closer to her son, so that he can help with her day to day care?  In any case, she may not want to simply gift the son money, as she may want the legal peace of mind of a lease.  In addition, he may not be in a position to let her live in the property for free, as he would be loosing potential revenue from the property.  If it can be demonstrated that the price she paid for the lease, is what she would have paid on the open market, I don't see the issue with this.  If we take these extra facts into consideration, why would you think differently?