Parents house swap/inheritance tax

Tuftymittens

Hi.  My elderly parents want to house swap with my wife and I,   they own their own home (appx 500k) and my wife and I have our own home but with an outstanding mortgage (our value prob 275k)
It makes sense for us to swap as they obvs have more room which they don't need anymore and they love our house anyway.
What are the possibilities of this?  I'm an only child so there are no sibling complications etc..
How can we swap and avoid any or as much inheritance tax as possible etc..
Someone mentioned they can gift the house to our kids or sign it to them in a trust etc..?  But does this avoid any inheritance tax?

We have also considered selling both houses and buying a larger single property (with a separate annexe or living area) for the parents.   Could we do this and buy it in my wife and I name?  Would this avoid inheritance tax?

Any help would be much appreciated 

Thanks

SDLT_Geek

Tuftymittens said:

Hi.  My elderly parents want to house swap with my wife and I,   they own their own home (appx 500k) and my wife and I have our own home but with an outstanding mortgage (our value prob 275k)
It makes sense for us to swap as they obvs have more room which they don't need anymore and they love our house anyway.
What are the possibilities of this?  I'm an only child so there are no sibling complications etc..
How can we swap and avoid any or as much inheritance tax as possible etc..
Someone mentioned they can gift the house to our kids or sign it to them in a trust etc..?  But does this avoid any inheritance tax?

We have also considered selling both houses and buying a larger single property (with a separate annexe or living area) for the parents.   Could we do this and buy it in my wife and I name?  Would this avoid inheritance tax?

Any help would be much appreciated 

Thanks

Are both properties in England?

If so you need to think as well about the stamp duty land tax charge either way on the market values of the properties if you do the exchange of properties.

Keep_pedalling

Presuming you will port you mortgage to your parents current house they would in effect be gifting you £225k. For IHT purposes this gift will remain within their estates for 7 years. 

Your second option is a terrible one because it a) there’s your parents long term security if you died before them, got divorced, went bankrupt or simply fell out with each other.

b) The 7 year rule will not apply as this would be a gift with reservation of benefit, so the £500k gift never falls out of there estate.

You don’t mention any other assets they hold but under the current rules their total assets would need to exceed £1M before ant IHT would need to be paid.

This leads on to c) if they ever needed residential care and they don’t have significant other assets then deliberate deprivation of assets may be an issue. 

Albermarle

Gifting in itself does not incur any tax at all, inheritance or any other sort.
It can mean the donor will pay less inheritance tax on their estate IF
The donor lives more than 7 years after making the gift.
The donor’s estate would be actually liable for inheritance tax in the first place. Many people are unecessarily concerned about IHT. 

Also the main thing is to do what works for everybody and not get too focused on tax

saajan_12

Tuftymittens said:

Hi.  My elderly parents want to house swap with my wife and I,   they own their own home (appx 500k) and my wife and I have our own home but with an outstanding mortgage (our value prob 275k)
It makes sense for us to swap as they obvs have more room which they don't need anymore and they love our house anyway.
What are the possibilities of this?  I'm an only child so there are no sibling complications etc..

If you swap the properties, then in effect parent are gifting you £225k, you're paying £275k for theirs (in kind) and they're paying 275k for yours (in kind). 
* For inheritance tax, thats 225k moved out of their estate so if they survive another 7 years, then no inheritance tax on that portion. For the rest of their estate its the same as the current situation. 
* For SDLT, the 275k portion isn't really a gift as both sides are paying something. However the Stamp duty is fairly low, just 5% on the amount exceeding 250k, so about 1.2k for parents and 1.2k for you.

Relatively small compared to the stamp duty and solicitors costs etc if you had to sell up and buy elsewhere. 

Tuftymittens said:

Someone mentioned they can gift the house to our kids or sign it to them in a trust etc..?  But does this avoid any inheritance tax?

We have also considered selling both houses and buying a larger single property (with a separate annexe or living area) for the parents.   Could we do this and buy it in my wife and I name?  Would this avoid inheritance tax?

People often talk about all sorts of ideas to avoid tax, but it rarely actually helps.. 
* Gifting to kids means they lose their FTB status so their subsequent purchases are more expensive, plus may be reckless or unmotivated with the money, etc
* Trusts come with their own fees, which for assets of this size, is probably going ot be more than the tax it saves, so wouldn't be worth it
* Larger property - is a whole different ball game of living situation and the impact to your daily life is more significant than relatively small tax amounts. The money side would be much higher SDLT on the purchase given its at a higher value. For Inheritance tax, the gift from parents is reserved for them to live in (part of) it, so it never leaves their estate until they actuallypass away - so no IHT benefit. 

Herzlos

saajan_12 said:

* For SDLT, the 275k portion isn't really a gift as both sides are paying something. However the Stamp duty is fairly low, just 5% on the amount exceeding 250k, so about 1.2k for parents and 1.2k for you.

Stamp duty would be on the total value (£500k) rather than the money transferred (275k)?

In essence OP would be paying £500k for the parents house, parents paying £275k for theirs, with the parents gifting them the shortfall.

SDLT_Geek

Herzlos said:

saajan_12 said:

* For SDLT, the 275k portion isn't really a gift as both sides are paying something. However the Stamp duty is fairly low, just 5% on the amount exceeding 250k, so about 1.2k for parents and 1.2k for you.

Stamp duty would be on the total value (£500k) rather than the money transferred (275k)?

In essence OP would be paying £500k for the parents house, parents paying £275k for theirs, with the parents gifting them the shortfall.

I agree.  SDLT (assuming the properties are in England) on the £500,000 property would be £12,500.  On the £275,000 property it would be £1,250.

That is assuming today's rates and thresholds.  Amounts payable will increase from 1 April 2025 when the threshold falls from £250,000 to £125,000.

Tuftymittens

Thanks for all the replies.  Much appreciated and much to deliberate.

We are very close and would ideally like to all live together in a larger house (or house with seperate annex) but this sounds like it has many more problems than is worth doing.

What if we both sold our properties and say got £775k for both,   could my parents then buy a smaller house (say £350) and gift us the £150k balance from the sale of the larger house allowing us to buy a similar house to theirs nearby?   So they got a smaller house and we got a larger house?  Oor would the costs of stamp, solicitors etc. outweigh any benefits.

saajan_12

Herzlos said:

saajan_12 said:

* For SDLT, the 275k portion isn't really a gift as both sides are paying something. However the Stamp duty is fairly low, just 5% on the amount exceeding 250k, so about 1.2k for parents and 1.2k for you.

Stamp duty would be on the total value (£500k) rather than the money transferred (275k)?

In essence OP would be paying £500k for the parents house, parents paying £275k for theirs, with the parents gifting them the shortfall.

SDLT_Geek said:

Herzlos said:

saajan_12 said:

* For SDLT, the 275k portion isn't really a gift as both sides are paying something. However the Stamp duty is fairly low, just 5% on the amount exceeding 250k, so about 1.2k for parents and 1.2k for you.

Stamp duty would be on the total value (£500k) rather than the money transferred (275k)?

In essence OP would be paying £500k for the parents house, parents paying £275k for theirs, with the parents gifting them the shortfall.

I agree.  SDLT (assuming the properties are in England) on the £500,000 property would be £12,500.  On the £275,000 property it would be £1,250.

That is assuming today's rates and thresholds.  Amounts payable will increase from 1 April 2025 when the threshold falls from £250,000 to £125,000.

Hmm.
Stamp duty is on the amount paid, not on the property value (unlike CGT). 
The kids are buying a property worth £500k, but only paying £275k in the form of their own property instead of cash. 
> So the amount paid for the bigger house = 275k for stamp duty calcs.

Essentially its a concessionary purchase at 275k which is under market value, which is different to if the parents gifted 225k of the deposit so that the kids could buy at the full 500k value. 

SDLT_Geek

saajan_12 said:

Herzlos said:

saajan_12 said:

* For SDLT, the 275k portion isn't really a gift as both sides are paying something. However the Stamp duty is fairly low, just 5% on the amount exceeding 250k, so about 1.2k for parents and 1.2k for you.

Stamp duty would be on the total value (£500k) rather than the money transferred (275k)?

In essence OP would be paying £500k for the parents house, parents paying £275k for theirs, with the parents gifting them the shortfall.

SDLT_Geek said:

Herzlos said:

saajan_12 said:

* For SDLT, the 275k portion isn't really a gift as both sides are paying something. However the Stamp duty is fairly low, just 5% on the amount exceeding 250k, so about 1.2k for parents and 1.2k for you.

Stamp duty would be on the total value (£500k) rather than the money transferred (275k)?

In essence OP would be paying £500k for the parents house, parents paying £275k for theirs, with the parents gifting them the shortfall.

I agree.  SDLT (assuming the properties are in England) on the £500,000 property would be £12,500.  On the £275,000 property it would be £1,250.

That is assuming today's rates and thresholds.  Amounts payable will increase from 1 April 2025 when the threshold falls from £250,000 to £125,000.

Hmm.
Stamp duty is on the amount paid, not on the property value (unlike CGT). 
The kids are buying a property worth £500k, but only paying £275k in the form of their own property instead of cash. 
> So the amount paid for the bigger house = 275k for stamp duty calcs.

Essentially it’s a concessionary purchase at 275k which is under market value, which is different to if the parents gifted 225k of the deposit so that the kids could buy at the full 500k value. 

You might want to look at the rules for the exchange of property interests and the market value rule: Finance Act 2003 section 47.