Are there any pitfalls..

Olinda99

The elderly father of a friend of mine is thinking of downsizing his house and buying a small flat

He was wondering if there were any pitfalls if he put the flat in his (only) son's name as well as his name as joint tenants

There is no wish to avoid IHT or deprive assets, it is simply for admin so that when he passes the flat becomes fully his son's

His son is married and already owns a house together with his wife.

Keep_pedalling

It would be foolish to do this, as this will we classed as a second home resulting in additional 5-8% tax depending on which part of the UK you live. It will also create a CGT liability for his son when the flat is sold.

Mark_d

Transferring his current flat into joint names is a sizeable gift to his son, so this could trigger tax liabilities.  As stated above, doing this would also mean the father is buying a second home for himself - incurring extra council tax and extra stamp duty.

If he's simply trying to dictate who gets what when he dies, then I think what he wants is a will. 

madbadrob

SPecific answer to the question is yes there are pitfalls.  Whilst doing this would bring the house outside of the estate and thus inheritance tax it could lead to claims of tax avoidance.  If he died within 7 years (it would be seen as a gift) of this gift then the house would fall back into the estate.  The house would also be considered a second home of the son which as council tax implications.  Then of course assuming he wouldnt want to move into this house and he chose to sell it there would be the issue of capital gains tax.  ETc etc

If I was advising them I would say write a will keep the house in sole name and if it would be the sons intention to sell on death have the willk written in such a way that the house should be sold and the monies then paid to the son.  This way the only tax incurred would be any IHT and of course the annual interest on the sum of money

Rob

bobster2

madbadrob said:

SPecific answer to the question is yes there are pitfalls.  Whilst doing this would bring the house outside of the estate and thus inheritance tax it could lead to claims of tax avoidance.  If he died within 7 years (it would be seen as a gift) of this gift then the house would fall back into the estate.  The house would also be considered a second home of the son which as council tax implications.  Then of course assuming he wouldnt want to move into this house and he chose to sell it there would be the issue of capital gains tax.  ETc etc

This is a bit mixed up.

If the father still lives there - it's a "gift with reservation" - so even after 7 years if the father is still benefiting from living there the value would be treated as part of his estate for the purposes of IHT.

Even though they are joint tenants - as the resident of the house - the father would be liable for the council tax. Council tax liability follows a hierarchy of liability. Top of the list is "a resident with a freehold interest in the whole or any part of the property" and a joint tenant who does not live there is not liable in this case.

Olinda99

Thanks for all the input - the flat would be well below the current IHT band it would be worth about 250k so yes it would be a gift with reservation but that wouldn't matter anyway. There would be some cash left over from the downsizing but the total would not exceed 350k

Would the extra 175k direct descendant relief be available in the scenario I have described?

The suggestion was only to avoid the hassle of going through probate as I assume the flat would just simply go to the son at the land registry as it would be a joint tenancy

Marcon

Olinda99 said:

Thanks for all the input - the flat would be well below the current IHT band it would be worth about 250k so yes it would be a gift with reservation but that wouldn't matter anyway. There would be some cash left over from the downsizing but the total would not exceed 350k

Would the extra 175k direct descendant relief be available in the scenario I have described?

The suggestion was only to avoid the hassle of going through probate as I assume the flat would just simply go to the son at the land registry as it would be a joint tenancy

Based on what you've said, probate would still be needed. Probably better for your friend to get some properly informed advice and make a will.

Keep_pedalling

Olinda99 said:

Thanks for all the input - the flat would be well below the current IHT band it would be worth about 250k so yes it would be a gift with reservation but that wouldn't matter anyway. There would be some cash left over from the downsizing but the total would not exceed 350k

Would the extra 175k direct descendant relief be available in the scenario I have described?

The suggestion was only to avoid the hassle of going through probate as I assume the flat would just simply go to the son at the land registry as it would be a joint tenancy

Probate is not difficult for a simple estate, certainly not worth paying an additional 5% SDLT on the purchase price for (assuming this is England) or the unnecessary CGT liability for his son. 

He also needs to factor in that half his house would be taken into account if his son divorced or was made bankrupt.

It is a terrible idea and he should not do it. 

Olinda99

Thanks for the input - much appreciated. Why is probate needed for a jointly held asset ?

Keep_pedalling

Olinda99 said:

Thanks for the input - much appreciated. Why is probate needed for a jointly held asset ?

No one said it was, the proposed plan would avoid having to apply for probate (unless the sone pre deceases his father), but it is going to cost thousands in extra tax so utterly pointless. 

Olinda99

@Marcon said it was a few posts up