Inheritance tax, and jointly owned property sold to pay care debt

sclare

Until recently my projected estate would be under the inheritance tax level. However, I was a joint owner of my late mum's rental property, which had now reverted to me by survivorship, and would take me over the line. 

The property will need to be sold so that my mum's half of the value can go towards the care debt that the council will want to be paid. So how will that affect me/my kids on my death? 
Half of the value might just keep me under the limit, but will HMRC focus on the full value, even though I've given half of it it to the council? Also there is no other 'inheritance' so I would want to give my brother half of 'my half' which presumably that could complicate IHT also?

If I wait for the council to force the sale, would that make any difference?

RAS

This is a Scottish situation if you refer to survivorship? 

Did mum have a will or any other assets for which you need confirmation? Was all her "half" of the property value subsumed into care costs?

And how are you managing the rental now? Are you selling with tenants or vacant possession?

sclare

RAS said:

This is a Scottish situation if you refer to survivorship? 

Did mum have a will or any other assets for which you need confirmation? Was all her "half" of the property value subsumed into care costs?

And how are you managing the rental now? Are you selling with tenants or vacant possession?

No, not Scottish. We were joint tenants of the property, so the property automatically became mine through survivorship (English Law) so is not part of her will. The rental income helped to pay her care fees, but was nowhere near enough so there is a large debt. 
Despite the property reverting to me as sole owner, the council can still pursue me for her half of the value of the property. 

The property has a long term tenant and is continuing to be managed by the agent in the short term. But it will need to be sold, either voluntarily by me, or forced by the council, to pay the debt. 

I'm hoping that the information I'm asking for here might help inform my decision whether to initiate the sale or wait for the council to act.
I haven't yet decided whether to sell with vacant possession, or with the tenant in place. 

bryanb

Joint tenants both own 100% not half each

Brie

Have you talked to the council about a payment plan?  They might not agree but that may depend on the amount of debt. 

But say you make a profit of £500 a month on the rent and the debt is £6k them paying them the rental profit will clear the debt in a year. 

Obviously if the debt is huge they may be reluctant to wait.  Then again it sometimes takes them months to come up with a final bill to be paid and cannot expect people to magic up money instantly.  

sclare

@Brie the debt is indeed huge. So they will definitely want the place sold. But I don't want the full burden of both CGT and future IHT problems when I'm likely (after expenses) to see less than half of its value.

Brie

sclare said:

@Brie the debt is indeed huge. So they will definitely want the place sold. But I don't want the full burden of both CGT and future IHT problems when I'm likely (after expenses) to see less than half of its value.

OK - but I'm trying to work this out then.....

If you were joint owners and your mom accrued a debt with the council for her care then they should have asked for it to be paid before her death to cover the fees.  In which case the place could be sold, CGT sorted, profit split 50/50, het IHT sorted and the council would be paid from mom's remaining portion.  If the debt was more than that I would have thought that's their tough luck.  You would get your 50% and IHT may or may not be an issue for you.

Or maybe....

If you were joint owners and mom wasn't asked for the money prior to her death and the house is now yours 100% then you don't need to sell as it's your house and not mom's and the council can only get what's left in mom's estate.  No CGT at this point as you were joint owners so the change of value of the property is immaterial.

I'm sure someone will be able pick holes in my logic as I'm neither a lawyer or an accountant.  

poseidon1

sclare said:

@Brie the debt is indeed huge. So they will definitely want the place sold. But I don't want the full burden of both CGT and future IHT problems when I'm likely (after expenses) to see less than half of its value.

Sclare you should be aware that your mother's defacto half share of the rental property receives a CGT free revaluation to market value on her death ( whether or not IHT on her estate is in point), so this should  ensure you do not pay CGT on sale proceeds other than on your half share.

 If there were a further slight increase in property value since your mother's death, do remember her estate receives a full cgt exemption in the tax year of death, followed by a half exemption for 2 years subsequently.

Technically speaking, the local authority debt accrued against your mother's half share of the property and was a debt thereon at the moment of her death, notwithstanding you acquired the whole by virtue of survivorship. Indeed you could find that the local authority registered a floating charge on the property to reflect this ( assuming they were aware of your mother's ownership).

Therefore from HMRC' s perspective your own estate would only have  increased by any net residual value of your mother's estate after paying off the local authority debt.

However, you indicate there will be no meaningful surplus in this regard, and you intend  to be fair to your brother, by gifting  half your share of the sale proceeds ( less CGT) to him in due course.

This being the case your IHT position with HMRC when the dust settles after the above events is your estate will have diminished by virtue of -

   1) CGT and sales costs related to sale of your own half share of the property

   2) Further diminished by virtue of gifting half your cash to your brother.  The 1st £6,000 of said gift        to him would fall within your £3,000 annual IHT gifts exemption assuming you did not use it in            the previous tax year, with the balance a potentially exempt transfer requiring you to survive 7              years for  it to fall out of account.  If you die within that period the gift will likely absorb part of            your personal IHT nil rate band, to detriment of your own estate, so bear that in mind.

As regards 2) above, and depending on timing  of the property sale, you could try and access a further £3,000 IHT gifts exemption in favour of your brother, by spliting your gift to him over the current tax year and 2024/25.

As regards exposing your personal estate to potential partial loss of Nil rate band by reason of the gift to your brother, depending on your age you could get a quote for a 7 year single premium term life policy to cover the IHT exposure on the gift, with the cost deducted from his gift. Only fair your family is not disadvantaged by your generosity in his favour.

Hope the above allays your concerns with regard to CGT, and signposts your own IHT position post sale of the property with ideas to mitigate potential consequences of a gift to your brother.

sclare

Thank you so much @poseidon1 for your very detailed and helpful reply. I'm very grateful for that 

The council did not put a charge on the property (surprisingly).

I have never had anything to do with this kind of thing, having always been PAYE. My mum's post-death tax return is the first time I've had to deal directly with HMRC. I'm okay with that bit. But when the council does approach me regarding this property, do I need to get and pay for specialist advice and help with this whole process? 

I am pretty concerned about my children losing out by me being fair to my brother, I have to say.

poseidon1

sclare said:

Thank you so much @poseidon1 for your very detailed and helpful reply. I'm very grateful for that 

The council did not put a charge on the property (surprisingly).

I have never had anything to do with this kind of thing, having always been PAYE. My mum's post-death tax return is the first time I've had to deal directly with HMRC. I'm okay with that bit. But when the council does approach me regarding this property, do I need to get and pay for specialist advice and help with this whole process? 

I am pretty concerned about my children losing out by me being fair to my brother, I have to say.

You don't mention whether your mother had a will or died intestate. The council in claiming the debt will legally need to approach the executor of her estate or administrator thereof in the absence of a will. You in your personal capacity are not legally responsible for her debt despite acquiring her half share of the property by survivorship.

In view of the above you might possibly  require some assistance in acquiring probate or letters of administration.

This will entail listing her assets and liabilities at date of death ( half market value of the property, any cash at bank less any pensions paid after death and any income tax payable on the property rents). Collating those numbers you should certainly be able to do yourself.

As regards probate itself, her estate should qualify as an excepted estate which should allow you to  go online direct with HMRC to obtain probate without having to submit an IHT return.

 This is the link to probate application Web page;

https://www.gov.uk/applying-for-probate/apply-for-probate

This is a link to a general article on probate matters with specific reference to the criteria for excepted estates - 

https://qlaw.co.uk/probate/excepted-estates-when-is-probate-not-required/#:~:text=Once you've determined that,complete the probate application online. 

I would suggest have a read of these matters, and you could find with some perseverance you could make a go at obtaining probate yourself.

As for subsequent tax compliance matters ( CGT, and income tax on rents ), you may need the help of an accountant, but in this regard who was handling the income tax reporting on the rents during your  mother's  lifetime?

sclare

Thank you again @poseidon1. My mother did have a will, but given the size of the debt, my mother's estate is insolvent, even with the 50% of the property included. I understand that that means there is no need for probate. Is that right?
But I also gather that that makes administering the estate much more of a responsibility. 

My plan at the moment (once I get all the information I need) is to complete the tax return for the year of death (23/24) to establish how much tax is owed. The relatively modest amount of savings that she had is in the process of being transferred to me to join what was left in her CA which I have placed in a new and separate account in my name. Once I have all the info regarding her capital and debt (which is all to the one creditor - the council) is that the point where I might need a solicitor to see what the next stage is?