Inheritance/capital gains tax

Brighty

Hello

I'm a bit in the dark as to the whole inheritance and capital gains tax business and need some advice.

The story is this

2 years ago myself and my brother bought our family home from our parents for 105k (valued at 160k). they purchased a bungalow in Lincs for 80k, moved and myself and my brother stayed in the old house down south.

My parents now own the bungalow and another house down here which is rented out, they owe nothing on either house. myself and my brother have a 100k mortgage on our house.

My parents are only in there early 60's but think it is time we sorted out how to get the other 2 houses into our ownership without paying inheritance or capital gains tax.

When they pass away we would sell the Lincs bungalow (low demand for rental property) and use the funds to purchase another rental property down here.

Any idea what our best option would be to minimalise the tax we end up paying?

Thanks

Brighty

MJSW

More information needed! How much is your parents rental property worth? How much has the value of their own house incereased since they bought it for £80k? Do they have any other assets in their estate (cash, shares and other investments)?

Unless they've got a lot of other assets, then on the face of it there isn't too much of a problem with Inheritance Tax, as they can each leave up to £263,000 without paying any. If their house cost £80k two years ago and is worth say £100k now, then there is still likely to be a fair bit spare for the other house.

If the combined estate is worth more than £263,000 (or is likely to grow to that level in a few years), then you should try to ensure that some assets are passed down to the children on the first death to utilise the nil rate band. If they all go to the other spouse then there would be some IHT on the second death.

The other thing to bear in mind is that the sale of the house worth £160,000 for only £105,000 will count as a potentially exempt transfer and would be added back to the estate for calculating IHT if they were to die within 7 years. However assuming they had made no other gifts > £250, then they would each get two years £3,000 exemption, so they amount added back would be £21.5k each.

Brighty

Thanks for the reply

Rental property is 180k
Their place is about 120k
not alot in the way of other assets

So am i right in saying they need to somehow each leave us 263k rather than leave it all to the spouse, therefore avoid paying tax on 37k (300-263)?

Does this 263k limit increase every few years to take account of inflation etc?

MJSW

No, in this case they wouldn't necessarily need to gift the full £263,000 on the 1st death, since the combined estate is only just above one nil rate band. What they could do, for example, is to make sure the rental property is owned as tenants in common, and then leave their half of it to the kids on the first death, with the main home going to the other spouse to continue to live in.

On the 1st death, IHT would be chargeable on the legacy to the kids only (half of £180k), plus the sale at undervalue on your house £21.5k (see above). That's well within the £263k exemption, so no IHT would be due.

On the 2nd death, the whole of the £120k house plus the remaining half of the £180k house would then pass to the kids. That's £210k, plus the £21.5k 'gift', making £231.5k, which again is within the exemption.

The £263k limit does tend to increase from year to year, although in recent years the increases have been well below the increases in prices of most peoples most valuable assets, ie houses.

However, you need to bear in mind that the above is based on current values. If the property prices were to increase further, then this idea may still leave some IHT on the the second death. It may be safer to leave half of the £120k house to the children on the first death as well, to increase the safety margin. There may also be other factors to consider, such as nursing home fees etc which may effect what can legitimately be gifted to children. Also the entire rules on Inheritance Tax could be changed at any time. It has been rumoured that Labour wanted to reform Inheritance Tax ever since they came to power, but so far they have only really tinkered at the edges and left the main principles in place.

Brighty

Thanks, think i understood all that  :-/

Is changing to tenants in common easy/cheap?

If after all this, we sell the 120k property, to buy another down here, will that incur cgt?

The 55k 'gift' difference in what our house was worth and what we paid for it. Does this no longer count in their estate after another 5 years (7 years from time of 'gift')?

If the 263k limit changes yearly, do people have to change their wills regularly to the new limit, or is there a way of stating in a will 'upto the limit' whatever that is at the time?

MJSW

1) I don't think changing to tennants in common is particularly difficult. I think there was a thread about it here recently which suggested it could be done without using a solicitor, but I've not been able to locate it.

2) As far as selling the £120k property is concerned, there should be no CGT if your parents sell it whilst alive, since it is their main home. If you inherit it, then you are deemed to have acquired it at the market value at the date of death. So there would only be a gain if the property increases between the date of death and the time you sell it.

3) Re the £55,000 'gift', yes you are correct. It won't be included in their estate after 7 years from the time of the gift (unless there is a reservation of benefit, for example if they were to move back in to the house).

4) Yes, it is common for wills to specify that legacies up to the current nil rate band be paid with the balance going to the spouse, so the will doesn't need changing every time the figure changes. However, it is of course a good idea to ensure that wills are reviewed on a regular basis anyway.