Second Home and IHT

Cosmo_Kramer

Very grateful for some advice on IHT please. 

My parents, who are almost 80, bought my sister and her family a house around 20 years ago (no mortgage). My parents put their own names on the title deeds, as well as my name and my brother’s name. So, we each own one-third. 

My sister moved out a few years later, and my parents turned it into a rental property. It has been rented continuously since. 

Please note that my brother and I did not contribute any capital towards the property when it was bought, and have never received any of the rental income. 

The house was sold recently and my parents want to transfer around £200k to me. I am a single mother with a new baby and they are keen for me to buy a bigger property. 

The burning question is - is this £200k legally and cleanly mine, because my name is on the title deeds as a legal owner? I will make sure to pay the CGT from my own funds. 

Or, in the very sad situation that my parents don’t survive the next 7 years, are HMRC going to hit me with an IHT bill for this money - because they view it as a gift from my parents? (my parents’ wider estate definitely pushes us into IHT territory). 

To make matters even more complicated, my parents aren’t planning on transferring my brother’s full share of the proceeds to him (trust issues). 

Very grateful for any advice. Many thanks. 

Albermarle

These situations can be complicated but I would have thought that by paying for the house, but splitting the ownership three ways, they effectively gifted you and your brother one third of the property at that time. If this was more than 7 years ago, then this should have no effect on IHT.

The house was sold recently and my parents want to transfer around £200k to me.

When the house was sold you should have been legally entitled to one third of the value. I would have thought you would have just received this directly from the conveyancing solicitor as you owned one third of the property? Did this not happen for some reason? How much did the house sell for?

Keep_pedalling

The proceeds of the house sale needs to be distributed either in equal portions or as per the deed of trust if one was made when the house was purchased. As it appears none of the legal owners ever lived in the property you will all have a capital gains tax liability that needs paying within 60 days of the sale. 

You say your sister moved out after a few years, is a few years less than seven?  If it was less than 7 then the part ownership your parents gave away is still within the estate as they were benefiting from the gift by taking 100%  of the income. They really should take professional advice from an accountant.. 

Cosmo_Kramer

Albermarle said:

These situations can be complicated but I would have thought that by paying for the house, but splitting the ownership three ways, they effectively gifted you and your brother one third of the property at that time. If this was more than 7 years ago, then this should have no effect on IHT.

The house was sold recently and my parents want to transfer around £200k to me.

When the house was sold you should have been legally entitled to one third of the value. I would have thought you would have just received this directly from the conveyancing solicitor as you owned one third of the property? Did this not happen for some reason? How much did the house sell for?

Many thanks for your response. 

Ah. In terms of HMRC viewing this as a gift, I thought that the seven years would start ticking now - when I receive the £200k? But you think it started ticking in 2005, when the property was purchased…?

The house was recently sold for around £600k.

My parents negotiated the sale of the property on our behalf and dealt directly with the solicitor, etc. I told them on numerous occasions that it would look much cleaner if my share of the proceeds was transferred directly from the solicitor. They failed to sort this out for some reason, and the full £600k was transferred to my parents. 

Cosmo_Kramer

Cosmo_Kramer said:

Albermarle said:

These situations can be complicated but I would have thought that by paying for the house, but splitting the ownership three ways, they effectively gifted you and your brother one third of the property at that time. If this was more than 7 years ago, then this should have no effect on IHT.

The house was sold recently and my parents want to transfer around £200k to me.

When the house was sold you should have been legally entitled to one third of the value. I would have thought you would have just received this directly from the conveyancing solicitor as you owned one third of the property? Did this not happen for some reason? How much did the house sell for?

Many thanks for your response. 

Ah. In terms of HMRC viewing this as a gift, I thought that the seven years would start ticking now - when I receive the £200k? But you think it started ticking in 2005, when the property was purchased…?

The house was recently sold for around £600k.

My parents negotiated the sale of the property on our behalf and dealt directly with the solicitor, etc. I told them on numerous occasions that it would look much cleaner if my share of the proceeds was transferred directly from the solicitor. They failed to sort this out for some reason, and the full £600k was transferred to my parents. 

Just a quick edit - my brother and I were obviously involved in the sale of the property, too. We signed various contracts and had correspondence with the solicitor, etc. I also had lots of correspondence with the selling estate agent. But my Dad was probably in the lead and was the one dealing with the solicitor on the final exchange/completion. 

Cosmo_Kramer

Keep_pedalling said:

The proceeds of the house sale needs to be distributed either in equal portions or as per the deed of trust if one was made when the house was purchased. As it appears none of the legal owners ever lived in the property you will all have a capital gains tax liability that needs paying within 60 days of the sale. 

You say your sister moved out after a few years, is a few years less than seven?  If it was less than 7 then the part ownership your parents gave away is still within the estate as they were benefiting from the gift by taking 100%  of the income. They really should take professional advice from an accountant.. 

Many thanks for your response. 

The house was purchased in 2005 and my sister moved out in 2012. It has been rented since then. 

My Dad’s accountant is currently working out how much capital gains tax we all need to pay in the next couple of months. 

I did ask the accountant whether the £200k would be viewed as a gift. She said it wouldn’t because my name is on the title deeds. She said that in the event HMRC come after me for IHT, I will just have to “build my case”.  

eskbanker

Cosmo_Kramer said:

I did ask the accountant whether the £200k would be viewed as a gift. She said it wouldn’t because my name is on the title deeds. She said that in the event HMRC come after me for IHT, I will just have to “build my case”.  

IHT is paid from/by the estate, so the recipient of gifts deemed not to be exempt would only be pursued if there weren't sufficient funds within the estate, which sounds unlikely in this scenario.

Cosmo_Kramer

eskbanker said:

Cosmo_Kramer said:

I did ask the accountant whether the £200k would be viewed as a gift. She said it wouldn’t because my name is on the title deeds. She said that in the event HMRC come after me for IHT, I will just have to “build my case”.  

IHT is paid from/by the estate, so the recipient of gifts deemed not to be exempt would only be pursued if there weren't sufficient funds within the estate, which sounds unlikely in this scenario.

Ah, I have Baby Brain at the moment. 

That’s a good point. So when my parents’ estate is going through probate and HMRC are calculating the IHT - if they deem the £200k to be a “gift”, they will just deduct it from my parents’ estate?

I was imagining a scenario where I would have to personally stump up £80k…

eskbanker

Cosmo_Kramer said:

eskbanker said:

Cosmo_Kramer said:

I did ask the accountant whether the £200k would be viewed as a gift. She said it wouldn’t because my name is on the title deeds. She said that in the event HMRC come after me for IHT, I will just have to “build my case”.  

IHT is paid from/by the estate, so the recipient of gifts deemed not to be exempt would only be pursued if there weren't sufficient funds within the estate, which sounds unlikely in this scenario.

Ah, I have Baby Brain at the moment. 

That’s a good point. So when my parents’ estate is going through probate and HMRC are calculating the IHT - if they deem the £200k to be a “gift”, they will just deduct it from my parents’ estate?

I was imagining a scenario where I would have to personally stump up £80k…

If HMRC deemed the £200K to be a gift, its value would be added back into the estate, not deducted from it, for IHT calculation purposes.

Keep_pedalling

Cosmo_Kramer said:

Albermarle said:

These situations can be complicated but I would have thought that by paying for the house, but splitting the ownership three ways, they effectively gifted you and your brother one third of the property at that time. If this was more than 7 years ago, then this should have no effect on IHT.

The house was sold recently and my parents want to transfer around £200k to me.

When the house was sold you should have been legally entitled to one third of the value. I would have thought you would have just received this directly from the conveyancing solicitor as you owned one third of the property? Did this not happen for some reason? How much did the house sell for?

Many thanks for your response. 

Ah. In terms of HMRC viewing this as a gift, I thought that the seven years would start ticking now - when I receive the £200k? But you think it started ticking in 2005, when the property was purchased…?

The house was recently sold for around £600k.

My parents negotiated the sale of the property on our behalf and dealt directly with the solicitor, etc. I told them on numerous occasions that it would look much cleaner if my share of the proceeds was transferred directly from the solicitor. They failed to sort this out for some reason, and the full £600k was transferred to my parents. 

£200k is more than a quarter share so some of this is a second gift. 

Cosmo_Kramer

eskbanker said:

Cosmo_Kramer said:

eskbanker said:

Cosmo_Kramer said:

I did ask the accountant whether the £200k would be viewed as a gift. She said it wouldn’t because my name is on the title deeds. She said that in the event HMRC come after me for IHT, I will just have to “build my case”.  

IHT is paid from/by the estate, so the recipient of gifts deemed not to be exempt would only be pursued if there weren't sufficient funds within the estate, which sounds unlikely in this scenario.

Ah, I have Baby Brain at the moment. 

That’s a good point. So when my parents’ estate is going through probate and HMRC are calculating the IHT - if they deem the £200k to be a “gift”, they will just deduct it from my parents’ estate?

I was imagining a scenario where I would have to personally stump up £80k…

If HMRC deemed the £200K to be a gift, its value would be added back into the estate, not deducted from it, for IHT calculation purposes.

Yep, I get that. Sorry, I meant that the tax will be deducted from the estate.