Is there IHT or CGT?

Misteek

Hi guys

If someone gifts their home to a friend, none relative. Is there any tax implications like IHT or CGT? 

The none relative has paid alot of money towards the property and they have a charge or restriction on the property as the money is owed back to them. The none relative helped the owner purchase the property hence why they have a charge or restriction I'm not sure which it is.

Thanks for any help. 

Keep_pedalling

If the person making the gift is planning to continue living there then for IHT purposes it will be a gift with reservation of benefit, so it will not be covered by the IHT 7 year rule so will not fall out of their estate. There is also the issue of deliberate deprivation of assets if they ever need residential care. 

CGT could also be issue for the friend when the house is eventually sold unless they also live there.

The sensible thing to do would be make sure the friend is made a major beneficiary of their estate. The friend should also make a will otherwise if they die first that charge could cause issues if the estate administrators called in the loan. This issue would be even more problematic if the friend owned the entire house.

Misteek

Keep_pedalling said:

If the person making the gift is planning to continue living there then for IHT purposes it will be a gift with reservation of benefit, so it will not be covered by the IHT 7 year rule so will not fall out of their estate. There is also the issue of deliberate deprivation of assets if they ever need residential care. 

CGT could also be issue for the friend when the house is eventually sold unless they also live there.

The sensible thing to do would be make sure the friend is made a major beneficiary of their estate. The friend should also make a will otherwise if they die first that charge could cause issues if the estate administrators called in the loan. This issue would be even more problematic if the friend owned the entire house.

Thank you so much 

The house itself is worth roughly 170. Which is under the threshold . There isnt anymore estate.

So the idea was the friend and the owner both have wills. The friend is the beneficiary of the home. There's no savings etc. So that's not an issue 

The friend will have their own will in place for their children etc.

Keep_pedalling

Misteek said:

Keep_pedalling said:

If the person making the gift is planning to continue living there then for IHT purposes it will be a gift with reservation of benefit, so it will not be covered by the IHT 7 year rule so will not fall out of their estate. There is also the issue of deliberate deprivation of assets if they ever need residential care. 

CGT could also be issue for the friend when the house is eventually sold unless they also live there.

The sensible thing to do would be make sure the friend is made a major beneficiary of their estate. The friend should also make a will otherwise if they die first that charge could cause issues if the estate administrators called in the loan. This issue would be even more problematic if the friend owned the entire house.

Thank you so much 

The house itself is worth roughly 170. Which is under the threshold . There isnt anymore estate.

So the idea was the friend and the owner both have wills. The friend is the beneficiary of the home. There's no savings etc. So that's not an issue 

The friend will have their own will in place for their children etc.

Several points on this, under no circumstances should this person give away their only significant asset, apart from coming under deprivation of assets it has potencial to cost them their long term security.

Their will needs to be drafted to cater for them no longer owning the house at the point of their death as it is possible the house might need to be sold to cover residential care costs.

Their friend will needs to make sure that the loan secured on the house is protected as long as this person still needs the house, which probably needs an immediate post death interest trust to be put in place.

Misteek

Keep_pedalling said:

Misteek said:

Keep_pedalling said:

If the person making the gift is planning to continue living there then for IHT purposes it will be a gift with reservation of benefit, so it will not be covered by the IHT 7 year rule so will not fall out of their estate. There is also the issue of deliberate deprivation of assets if they ever need residential care. 

CGT could also be issue for the friend when the house is eventually sold unless they also live there.

The sensible thing to do would be make sure the friend is made a major beneficiary of their estate. The friend should also make a will otherwise if they die first that charge could cause issues if the estate administrators called in the loan. This issue would be even more problematic if the friend owned the entire house.

Thank you so much 

The house itself is worth roughly 170. Which is under the threshold . There isnt anymore estate.

So the idea was the friend and the owner both have wills. The friend is the beneficiary of the home. There's no savings etc. So that's not an issue 

The friend will have their own will in place for their children etc.

Several points on this, under no circumstances should this person give away their only significant asset, apart from coming under deprivation of assets it has potencial to cost them their long term security.

Their will needs to be drafted to cater for them no longer owning the house at the point of their death as it is possible the house might need to be sold to cover residential care costs.

Their friend will needs to make sure that the loan secured on the house is protected as long as this person still needs the house, which probably needs an immediate post death interest trust to be put in place.

I understand but in any case would this affect the friend when it comes to CGT even later on? The friend will never see the owner on the road. He is a very close family friend. 

Keep_pedalling

Misteek said:

Keep_pedalling said:

Misteek said:

Keep_pedalling said:

If the person making the gift is planning to continue living there then for IHT purposes it will be a gift with reservation of benefit, so it will not be covered by the IHT 7 year rule so will not fall out of their estate. There is also the issue of deliberate deprivation of assets if they ever need residential care. 

CGT could also be issue for the friend when the house is eventually sold unless they also live there.

The sensible thing to do would be make sure the friend is made a major beneficiary of their estate. The friend should also make a will otherwise if they die first that charge could cause issues if the estate administrators called in the loan. This issue would be even more problematic if the friend owned the entire house.

Thank you so much 

The house itself is worth roughly 170. Which is under the threshold . There isnt anymore estate.

So the idea was the friend and the owner both have wills. The friend is the beneficiary of the home. There's no savings etc. So that's not an issue 

The friend will have their own will in place for their children etc.

Several points on this, under no circumstances should this person give away their only significant asset, apart from coming under deprivation of assets it has potencial to cost them their long term security.

Their will needs to be drafted to cater for them no longer owning the house at the point of their death as it is possible the house might need to be sold to cover residential care costs.

Their friend will needs to make sure that the loan secured on the house is protected as long as this person still needs the house, which probably needs an immediate post death interest trust to be put in place.

I understand but in any case would this affect the friend when it comes to CGT even later on? The friend will never see the owner on the road. He is a very close family friend. 

Yes CGT would likely to be payable on the eventual sale.

However much this friend is trusted, their beneficiaries may not be should the friend die first, they may also loose mental capacity which again puts decisions in other people’s hands.

I can’t say this enough, giving away your only significant asset is a very stupid thing to do, so no way should they do it. 

SDLT_Geek

Misteek said:

Hi guys

If someone gifts their home to a friend, none relative. Is there any tax implications like IHT or CGT? 

The none relative has paid alot of money towards the property and they have a charge or restriction on the property as the money is owed back to them. The none relative helped the owner purchase the property hence why they have a charge or restriction I'm not sure which it is.

Thanks for any help. 

There is a tax for the friend to consider: stamp duty.  If the property is in England it would be stamp duty land tax.

The "chargeable consideration" given for SDLT would be the amount of debt forgiven as part and parcel of the transfer of the property.

Misteek

SDLT_Geek said:

Misteek said:

Hi guys

If someone gifts their home to a friend, none relative. Is there any tax implications like IHT or CGT? 

The none relative has paid alot of money towards the property and they have a charge or restriction on the property as the money is owed back to them. The none relative helped the owner purchase the property hence why they have a charge or restriction I'm not sure which it is.

Thanks for any help. 

There is a tax for the friend to consider: stamp duty.  If the property is in England it would be stamp duty land tax.

The "chargeable consideration" given for SDLT would be the amount of debt forgiven as part and parcel of the transfer of the property.

Thank you....The property is around 170 or 180 I think. 

I just can't get my head around of understanding if IHT and CGT will apply to the friend. Does he have to pay them and when will that be ,?

Bookworm105

Misteek said:

I just can't get my head around of understanding if IHT and CGT will apply to the friend. Does he have to pay them and when will that be ,?

please can you confirm I have understood these facts:
a) non relative has a charge against a property but is NOT (currently) a legal co-owner of that property; and
b) non relative does not live in the property.

if those are correct then the current position is:

• CGT is not applicable for the non relative since they do not own the property, so cannot sell it, and thus cannot cause a capital gain to arise in their name. 
• If the charge means non relative will get back more money than they contributed in the first place, then that profit is not a capital profit, it is an income profit, and would be subject to income tax payable by non relative, not CGT. (In essence they loaned someone some money and are getting the lump sum back with interest added on)
• The property resident / owner is unlikely to incur IHT given you state the value of the property is "only" 180 and they have no other money in their estate. If the property owner's will  leaves the property to the non relative then IHT is irrelevant.
• if non relative acquires ownership of the property via owner's will upon their death then no CGT is due at that point, but if non relative continues to own it without living in it then non relative would become liable for CGT on the gain from value at date of inheritance to the amount it subsequently sells for. (Note if sale is "close" to date of death then the sale may be treated as part of the estate depending on what the executor of the will does, in that case non relative would not be exposed to CGT as it would be a sale by the estate, not by him.)
  
  

HOWEVER, the scenario you are suggesting is that resident owner will gift the property to non relative, so instead of having only a charge against the property, non relative will now be its owner in exchange for "cancelling" the debt (charge).
Resident owner will remain living there until their death. Non relative will not live in it. That does have some tax implications:

• resident (ex-owner) will have made a "gift with reservation of benefit", therefore the value of the property remains within their estate. But it appears their estate is well below IHT threshold anyway, so IHT on resident (ex-owner's) death remains irrelevant.
• non relative (now owner) will be exposed to CGT on a property they own but do not use as their own main home. CGT will be payable when the property is finally sold (presumably on death of resident ex-owner) and will be based on the difference between the amount of outstanding debt (charge) cancelled when they "purchased" the property (ie their "original cost") and what it later sells for. That is their taxable capital gain. As non relative is not a relative, the gift is not subject to the market value rule in terms of deciding what the "original cost" is for the CGT calculation.
• SDLT as explained above by SDLT_GEEK

In terms of "deprivation of capital", if resident ex-owner ever needs to make a claim for means tested care home costs then there is very strong chance that, with no other money to his name, the fact he gave away the property would be seen as deprivation of capital. What that would mean in reality is open to debate since the council cannot force the sale of a property he no longer owns. Thus it may mean they simply refuse to fund his care home needs and he would have to pay for it himself in full using money it appears he does not have!
Moral dilemma for non relative in that case, should he sell the house he now owns but does not live in and use that money (after paying CGT) to pay his friend's care home fees ?

Misteek

Bookworm105 said:

Misteek said:

I just can't get my head around of understanding if IHT and CGT will apply to the friend. Does he have to pay them and when will that be ,?

please can you confirm I have understood these facts:
a) non relative has a charge against a property but is NOT (currently) a legal co-owner of that property; and
b) non relative does not live in the property.

if those are correct then the current position is:

• CGT is not applicable for the non relative since they do not own the property, so cannot sell it, and thus cannot cause a capital gain to arise in their name. 
• If the charge means non relative will get back more money than they contributed in the first place, then that profit is not a capital profit, it is an income profit, and would be subject to income tax payable by non relative, not CGT. (In essence they loaned someone some money and are getting the lump sum back with interest added on)
• The property resident / owner is unlikely to incur IHT given you state the value of the property is "only" 180 and they have no other money in their estate. If the property owner's will  leaves the property to the non relative then IHT is irrelevant.
• if non relative acquires ownership of the property via owner's will upon their death then no CGT is due at that point, but if non relative continues to own it without living in it then non relative would become liable for CGT on the gain from value at date of inheritance to the amount it subsequently sells for. (Note if sale is "close" to date of death then the sale may be treated as part of the estate depending on what the executor of the will does, in that case non relative would not be exposed to CGT as it would be a sale by the estate, not by him.)
  
  

HOWEVER, the scenario you are suggesting is that resident owner will gift the property to non relative, so instead of having only a charge against the property, non relative will now be its owner in exchange for "cancelling" the debt (charge).
Resident owner will remain living there until their death. Non relative will not live in it. That does have some tax implications:

• resident (ex-owner) will have made a "gift with reservation of benefit", therefore the value of the property remains within their estate. But it appears their estate is well below IHT threshold anyway, so IHT on resident (ex-owner's) death remains irrelevant.
• non relative (now owner) will be exposed to CGT on a property they own but do not use as their own main home. CGT will be payable when the property is finally sold (presumably on death of resident ex-owner) and will be based on the difference between the amount of outstanding debt (charge) cancelled when they "purchased" the property (ie their "original cost") and what it later sells for. That is their taxable capital gain. As non relative is not a relative, the gift is not subject to the market value rule in terms of deciding what the "original cost" is for the CGT calculation.
• SDLT as explained above by SDLT_GEEK

In terms of "deprivation of capital", if resident ex-owner ever needs to make a claim for means tested care home costs then there is very strong chance that, with no other money to his name, the fact he gave away the property would be seen as deprivation of capital. What that would mean in reality is open to debate since the council cannot force the sale of a property he no longer owns. Thus it may mean they simply refuse to fund his care home needs and he would have to pay for it himself in full using money it appears he does not have!
Moral dilemma for non relative in that case, should he sell the house he now owns but does not live in and use that money (after paying CGT) to pay his friend's care home fees ?

Omg thank you soo much for that info ! So kind of you to take the time out to write all that and all the different scenarios!

Your presumptions were correct. I'm not sure if it's a charge or a restriction the relative has. But it's definitely for a debt owed to him.

Am I right to understand the relative will only be exempt from CGT if he moves in upon the death of the old owner if he now owns it due to the will. What if the property is gifted to him whilst the owner is still alive and the old owner moves into the family home as no one lives there. The family home is owned by the relatives family but don't live there.


Lastly is SDLT only applicable if the relative has already a house in his name ? Therefore this becomes the second home. Also would this apply upon death of owner?

Misteek

@Bookworm105 please have a read of my query above