IHT - house ownership, 7 year rule & paperwork

marchesini46

Hi all, my parents are asking to put an investment house into my name to minimise any inheritance tax. It’s not worth a huge amount (about £200k) but it’ll be part of a larger estate which will be split with other siblings. From my very basic understanding, they can transfer any property into my name (and they would continue to keep the rent as it mortgage free and rented out) and so long as one or both of them live for the next 7 years, I am not liable for any IHT. Furthermore, I wouldn’t be liable to pay any tax on rental income as I’m am not collecting any rent on the property? Have I understood this correctly? 

If so, I’m not entirely sure of whose names are on the rental property - whether it is just my mother or both parents? Would that make a difference to any IHT as I assume any property would only pass onto myself once both parents have passed?

Assuming I’ve understood the above, what is simplest way to transfer ownership of the property? From my past experience of wills being written, I know that you can often end up paying ridiculous fees for a simple task - if you don’t ask the right people. 

Thanks for your knowledge and time.

p00hsticks

marchesini46 said:

 From my very basic understanding, they can transfer any property into my name (and they would continue to keep the rent as it mortgage free and rented out) and so long as one or both of them live for the next 7 years, I am not liable for any IHT. Furthermore, I wouldn’t be liable to pay any tax on rental income as I’m am not collecting any rent on the property? Have I understood this correctly? 

This arrangement sounds to me as if it could be considered a 'gift with reservation of benefit' and so not fall outside your parents estate for IHT purposes.

 It's certainly the case that if someone signs over the property they live in to someone but continues to live in it without paying that person market rent, then it remains in the original owners estate for IHT purposes.

 I suspect that the same might be true if you sign over a rental property but keep the rent, but don't know for sure.

theoretica

If they give the property now, they will need to pay CGT on its present increase in value - and it would be the present value that becomes your starting point for future CGT.  If you inherit is, in due course, there is no CGT to pay at the time of inheritance, and the starting value for your future CGT is the value at the time of inheritance which will quite possibly be higher.   This is likely to counteract some of the hoped for savings.

marchesini46

p00hsticks said:

marchesini46 said:

 From my very basic understanding, they can transfer any property into my name (and they would continue to keep the rent as it mortgage free and rented out) and so long as one or both of them live for the next 7 years, I am not liable for any IHT. Furthermore, I wouldn’t be liable to pay any tax on rental income as I’m am not collecting any rent on the property? Have I understood this correctly? 

This arrangement sounds to me as if it could be considered a 'gift with reservation of benefit' and so not fall outside your parents estate for IHT purposes.

 It's certainly the case that if someone signs over the property they live in to someone but continues to live in it without paying that person market rent, then it remains in the original owners estate for IHT purposes.

 I suspect that the same might be true if you sign over a rental property but keep the rent, but don't know for sure.

I’d never heard of that rule before but it seems that it would make perfect sense and the same rules would apply ☹️.

marchesini46

theoretica said:

If they give the property now, they will need to pay CGT on its present increase in value - and it would be the present value that becomes your starting point for future CGT.  If you inherit is, in due course, there is no CGT to pay at the time of inheritance, and the starting value for your future CGT is the value at the time of inheritance which will quite possibly be higher.   This is likely to counteract some of the hoped for savings.

Every day is a school day. I wasn’t aware that gifting was so complex. I own a property that I’ve let out for nearly 20 years and isn’t really worth selling as I’d have to pay so much CGT.  By the same token, I guess that in the event of my parents passing, not only is IHT payable (by however inherits the property) but CGT is payable as well? Or is it only one or the other? 

p00hsticks

marchesini46 said:

theoretica said:

If they give the property now, they will need to pay CGT on its present increase in value - and it would be the present value that becomes your starting point for future CGT.  If you inherit is, in due course, there is no CGT to pay at the time of inheritance, and the starting value for your future CGT is the value at the time of inheritance which will quite possibly be higher.   This is likely to counteract some of the hoped for savings.

Every day is a school day. I wasn’t aware that gifting was so complex. I own a property that I’ve let out for nearly 20 years and isn’t really worth selling as I’d have to pay so much CGT.  By the same token, I guess that in the event of my parents passing, not only is IHT payable (by however inherits the property) but CGT is payable as well? Or is it only one or the other? 

It's one or the other - CGT if they sell before they die, IHT if they die while still owning it.
One proviso - if the property increases in value after that declared for IHT purposes then there may also be some CGT liability on the rise in value payable by the estate at the point it is sold. 

To correct something you've said a couple of times now - it isn't the recipient of a gift made within 7 years of death or beneficiary after death that pays IHT, it comes out of the deceaseds estate.

Jeremy535897

This has all the hallmarks of a very bad idea. If your parents keep the property, inheritance tax is paid on their deaths. All giving the property to you but retaining the right to the rent does is add a capital gains tax liability on top, based on the market value at the date of gift (under current rules, if they kept the property, this would disappear on your parents' death, although the Budget may change that, and many other things). A gift with reservation means that the gift to you is a potentially exempt transfer still, but the property is still theirs for inheritance tax.
There may be complex ways round this, but the costs will outweigh the benefits.
If your parents really want to do this, and it won't be where you live, they should gift it to a discretionary trust, with you as a beneficiary, forego the rent, and hold over the gain into the trust. Then if they live seven years after making the gift, there is no inheritance tax. The capital gains tax free uplift on death will be lost, but the charge will at least only arise when it is sold and there are funds to pay it.

Keep_pedalling

p00hsticks said:

marchesini46 said:

theoretica said:

If they give the property now, they will need to pay CGT on its present increase in value - and it would be the present value that becomes your starting point for future CGT.  If you inherit is, in due course, there is no CGT to pay at the time of inheritance, and the starting value for your future CGT is the value at the time of inheritance which will quite possibly be higher.   This is likely to counteract some of the hoped for savings.

Every day is a school day. I wasn’t aware that gifting was so complex. I own a property that I’ve let out for nearly 20 years and isn’t really worth selling as I’d have to pay so much CGT.  By the same token, I guess that in the event of my parents passing, not only is IHT payable (by however inherits the property) but CGT is payable as well? Or is it only one or the other? 

It's one or the other - CGT if they sell before they die, IHT if they die while still owning it.
One proviso - if the property increases in value after that declared for IHT purposes then there may also be some CGT liability on the rise in value payable by the estate at the point it is sold. 

To correct something you've said a couple of times now - it isn't the recipient of a gift made within 7 years of death or beneficiary after death that pays IHT, it comes out of the deceaseds estate.

In some cases you can get the double hit of both taxes. If for example the OPs parents transfer the house to the OP they will pay CGT on the gain in market value since they purchased it and if the die within 7 years then it is still within the estate so IHT may also be payable. This will also be the case beyond 7 years if they are still receiving the rental income. The OP would also have a CGT liability when they eventually sell it.

marchesini46

Ok, so what I thought was a relatively simple transfer of ownership has highlighted a number of potential challenges with regards to my parents estate. 

Currently, they have several properties (all mortgage free) which are rented out for additional income in their retirement. Each of their children (myself included) have been allocated a house each upon their passing. Each property are not worth the sane as they were allocated at random to avoid any arguments later.  They are all fully owned by my parents. 

So according to my new understanding, there are absolutely no benefits to transferring any of these properties to myself or my siblings as they would be liable to pay CGT from their original purchase prices. However, upon my parents passing, there will be an inheritance tax to pay on each house by the estate (not the recipient). As each house is likely to have a sitting tenant upon each of us receiving the property, we can either continue to rent the property or sell with no CGT liability?

It also seems it’s my parents generosity is way more complex than it appears so would be prudent to thrash out all the details on taxes etc to avoid any arguments later on. Is a financial advisor the best person to discuss or someone else?

Jeremy535897

A financial adviser will talk about the investment side of things. Your parents need a good tax adviser, usually a specialist accountant, or alternatively a member of the Society of Trust and Estate practitioners. See https://www.step.org/
If houses are left specifically to beneficiaries in a will, their base cost, at least as things stand at the moment, is the market value with the tenant in place, which may be discounted compared with the freehold value.

silvercar

marchesini46 said:

Ok, so what I thought was a relatively simple transfer of ownership has highlighted a number of potential challenges with regards to my parents estate. 

Currently, they have several properties (all mortgage free) which are rented out for additional income in their retirement. Each of their children (myself included) have been allocated a house each upon their passing. Each property are not worth the sane as they were allocated at random to avoid any arguments later.  They are all fully owned by my parents. 

So according to my new understanding, there are absolutely no benefits to transferring any of these properties to myself or my siblings as they would be liable to pay CGT from their original purchase prices. However, upon my parents passing, there will be an inheritance tax to pay on each house by the estate (not the recipient). As each house is likely to have a sitting tenant upon each of us receiving the property, we can either continue to rent the property or sell with no CGT liability?

It also seems it’s my parents generosity is way more complex than it appears so would be prudent to thrash out all the details on taxes etc to avoid any arguments later on. Is a financial advisor the best person to discuss or someone else?

Unless the tenants have been in situ since the 80s, I doubt you mean sitting tenants. More likely they are tenants subject to an AST. So you could give notice to them and sell up if you wished.

the inheritance tax is based on the total value of the estate and paid from the estate. So provided there is money available over and above the tenanted properties eg savings or their residential home, you wouldn’t need to sell any of the tenanted properties.