IHT on cash gift used to buy joint house

jitterbug67

My father sold his house in 2018, and gave me £360k.  I used the money together with £260k of my own to buy a house in my name.  He has lived with me in this house since. I pay for all the bills and expenses.  I am worried we haven't planned IHT: how will this be taxed?  I imagine it is not a Potentially Exempt gift as he has retained a benefit.  Any clues?

Keep_pedalling

A bit more info required, how much does he have in savings and other assets? Is he a widower?

Jeremy535897

The gift by your father was a potentially exempt transfer, but that will fall out of account after seven years. Assuming that the gift by father was not conditional on father occupying the house rent free, I suspect that the reservation of benefit rules don't apply.
However, the pre-owned asset rules (POAT) will apply, and they are complex and can create an income tax charge on your father based on a deemed rental value of the property. You should seek advice as there is a potential underdeclaration of income by your father for several years.

jitterbug67

20k savings, no other assets, long divorced.

jitterbug67

Jeremy535897 said:

The gift by your father was a potentially exempt transfer, but that will fall out of account after seven years. Assuming that the gift by father was not conditional on father occupying the house rent free, I suspect that the reservation of benefit rules don't apply.
However, the pre-owned asset rules (POAT) will apply, and they are complex and can create an income tax charge on your father based on a deemed rental value of the property. You should seek advice as there is a potential underdeclaration of income by your father for several years.

He occupies one room.  His only income is under £6k pension per year. I don't think he'd be liable for income tax.

jitterbug67

I am just thinking rent for a room @£100 per week plus his pension comes to less than personal tax allowance.  But I may be thinking wrong!

Keep_pedalling

As it stands even if the gift does not fall out of his estate under POAT rules his residential NRB is still available to avoid any IHT although that may change in the budget.

Another potential issue here is deliberate deprivation of assets which will affect benefits entitlement and care costs. Hopefully living with you will avoid the latter.

You also should put plans in place to cover something happening to you, as in giving virtually all his assets away his long term security is totally dependant on you not dying, loosing mental capacity or going bankrupt. Although this risks may be small the consequences could be horrendous for him. 

jitterbug67

[Deleted User] said:

jitterbug67 said:

I am just thinking rent for a room @£100 per week plus his pension comes to less than personal tax allowance.  But I may be thinking wrong!

Is your dad just locked in one room or do you allow him in to the rest of the house? Let's say a typical yield on a BTL was 4% (a random number) then why would the income not be £14,400 (4% x £620,000) x (£360,000 / £620,000)?  As I say, I know little about these rules.

I guess he could have earned that much in btl but the reality is if he moves out and a lodger moves in they'd pay about £100 a month for the room and share communal space.

jitterbug67

Sorry, a week not a month!

Bookworm105

POAT is rare as GWR is normally very wide ranging at catching attempted DIY tax planning.  However, in the scenario where you give money which is then used to buy a property you do not own but do live in for free that is exactly the situation where a GWR would not apply so the POAT rules were designed to catch that for inheritance purposes 
Gifting property – some tax points to consider | Low Incomes Tax Reform Group

Pre-Owned Asset Tax applies under specific circumstances where the following criteria are met:

Previous Ownership: The individual must have owned the asset or provided funds for its acquisition.

Continued Enjoyment: The individual continues to benefit from the asset without paying full market value for such enjoyment.

Relevant Arrangements: The asset is held in a way that suggests an arrangement to avoid inheritance tax, such as transferring it to a trust or to family members while still benefiting from it.

HMRC do not specify how the rental value should be arrived at, but they "expect the chargeable person to take all reasonable steps to ascertain the valuations". In HMRC speak that effectively means they will give more credence to a figure sourced by a professional valuer, not a DIY stab at it.

Note: the ‘rental value’ of the land for the taxable period is the rent which would have been payable for the period if the property had been let to the chargeable person at an annual rent equal to the annual value.
Your assumption the annual value is based on lodger rather than (co)tenant status is an argument you would need to have with HMRC.

Jeremy535897

The rules are very complex, and are set out in https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm44010 et seq. There is also a lot of detail here:
https://www.shipleys.com/resources/pre-owned-assets-charge/