Inheritance Tax or Capital Gains - which is better?

Pixiedog1

My elderly father is looking to sell his house and move in with me. He wants to use the proceeds to help reduce my mortgage, so I can work less, look after him and spend some quality time together, making memories. 

His house is worth around £400k and he doesn’t have other savings or assets. I understand we’d have to pay inheritance tax on anything over £325k. 

Another idea would be to transfer his house to me, whereupon I sell it. I’m assuming I wouldn’t be liable for inheritance tax on house, as less than £500k, but what about Capital Gains Tax? Would I be liable, if I sold dad’s house as soon as transferred, so no gain on value?

Whichever way we did it, the idea would be to put the sum into my house to massively reduce my mortgage. 

What is the 7 year rule? Does it apply to both IT and CGT? My dad is in his late 80’s and in poor health. This is why it’s so important to me to work much less and look after him. I’m nearly 60 myself.

Many thanks in advance for your help. 

Jeremy535897

Your father is entitled to an inheritance tax nil rate band of £325,000, plus a residential nil rate band of up to £175,000, which is not automatically lost if he sells the house before he dies. It is a complex area, and here is some more detail:
https://www.gov.uk/guidance/how-downsizing-selling-or-gifting-a-home-affects-the-additional-inheritance-tax-threshold
I am assuming your mother is deceased? It may be that her nil rate bands are also available, worth up to £1 million when combined with your father's nil rate bands. I am assuming neither made any significant gifts in the past?
He may as well sell the house himself, as it will be exempt from capital gains tax if he lived there throughout his ownership of it as a main residence, although the last 9 months of ownership will also be exempt if he moves in with you first. All that giving the house to you first achieves is to create a possible capital gains tax liability on you and the need for a valuation at the date of the gift.

sheramber

You say he is in  poor health.
 Should he need to go into residential care  would he have  money available to pay for his care?

If relying on  local authority funded care then look up deprivation of assets. 

Pixiedog1

He won’t be going into care, he’ll be staying with me, just trying to find the most tax efficient way of doing it, so we can put the maximum amount possible into my mortgage, so I can give up work to look after dad, or work less at the very least. Thanks everyone for your help. I’m new here, and finding the tax thing a bit mind blowing! 

Keep_pedalling

Your father’s estate is way below IHT levels (even more so if he is a widower), so tax is not an issue here.

Gifting his entire net worth away is however potentially problematic, as this would undoubtedly be classed as deliberate deprivation of assets if he needs residential care. Yes, living with you reduces the chance of that happening but it does not reduce that chance to zero. His needs may end up beyond you capabilities, or something could happen to you that prevents you caring for him. 

JamesRobinson48

What would become of your father if you unexpectedly die or become incapacitated?  

elsien

Pixiedog1 said:

He won’t be going into care, he’ll be staying with me, just trying to find the most tax efficient way of doing it, so we can put the maximum amount possible into my mortgage, so I can give up work to look after dad, or work less at the very least. Thanks everyone for your help. I’m new here, and finding the tax thing a bit mind blowing! 

Although many people don’t go into residential care, it’s not possible to say it will never happen. My grandmother was adamant she was never going into care but at the point she needed two people to move her it became unaffordable for her to stay at home.

Hope for the best and plan for the worst, so on that basis giving his money away to you may not be sensible. There is no time limit on deprivation of assets, and although intention is the primary thing that needs to be considered, I would suggest you do read more up about it to be on the safe side given that he is  already in poor health. 

Jeremy535897

Keep_pedalling said:

Your father’s estate is way below IHT levels (even more so if he is a widower), so tax is not an issue here.

Gifting his entire net worth away is however potentially problematic, as this would undoubtedly be classed as deliberate deprivation of assets if he needs residential care. Yes, living with you reduces the chance of that happening but it does not reduce that chance to zero. His needs may end up beyond you capabilities, or something could happen to you that prevents you caring for him. 

As OP says there is no intention of father going into care, the council would have a bit of difficulty arguing deprivation of assets if it transpired that, completely unforeseen at the date of the gift, he did go into care at some time in the future.

Jeremy535897

elsien said:

Pixiedog1 said:

He won’t be going into care, he’ll be staying with me, just trying to find the most tax efficient way of doing it, so we can put the maximum amount possible into my mortgage, so I can give up work to look after dad, or work less at the very least. Thanks everyone for your help. I’m new here, and finding the tax thing a bit mind blowing! 

Although many people don’t go into residential care, it’s not possible to say it will never happen. My grandmother was adamant she was never going into care but at the point she needed two people to move her it became unaffordable for her to stay at home.

Hope for the best and plan for the worst, so on that basis giving his money away to you may not be sensible. There is no time limit on deprivation of assets, and although intention is the primary thing that needs to be considered, I would suggest you do read more up about it to be on the safe side given that he is  already in poor health. 

The council can't just assume anyone elderly who makes a gift is subject to the deprivation of assets rules. See
https://www.ageuk.org.uk/siteassets/documents/factsheets/fs40_deprivation_of_assets_in_social_care_fcs.pdf

elsien

Which is why I said that intention is the primary thing that needs to be considered....