advice required on buying Mums House

[tcaller]

We are planning to sell our Family home and buy my mothers house. We would like to buy this for 20% below what the estate agent would probably value it at.
We are going to make several improvements including an extention for her (with shared services and not with own front door) and several home improvements including additional bathrooms, larger kitchen etc. to make it servicable for all of us.

What tax implications could be expected with respect to CGT and IHT?

and would there be a problem paying Stamp Duty for the house brought at a reduced price?

[maths]

Assuming your mother has always resided in the property since its acquisition no CGT arises on her part.

However, if you purchase at below market value she is regarded as having made a gift of the difference. If she survives 7 years thereafter no IHT arises; if she dies within this period IHT arises unless the amount falls within her nil rate band (£325,000 possibly £650,000).

SDLT is based on what you pay for it; there is no adjustment to market value.

[pqtaxation]

.... if you purchase at below market value she is regarded as having made a gift of the difference. If she survives 7 years thereafter no IHT arises; ..

But the OP's plan is for his mother to continue to reside in the house and so won't this gift of the difference be a reservaion of benefit for as long as she does so?

[maths]

pqtaxation is quite correct.

Apologies tcaller as I should have read your post more closely.

In short, by mother selling at below market and remaining in the house she has made for IHT a gift with reservation which means its value on her death is subject to IHT (if her estate is below £325,000 or possibly £650,000 on death no IHT problem).If IHT is an issue there may be better options.

[tcaller]

So there will be no CGT implications for us or her?
No IHT if on death her estate is less than £325K? How would she qualify for £650 threshold if my father has already passed away?
would there be any benefit in her remaining on the title deeds?

Can I ask, who decides Market Value if we arn't using an estate agent to purchase through? We instruct a solicitor to do the conveyancing.....how does the house get valued and does it need to be legally? On various property valuation websites the house is supposedly worth 575K but one recently sold in the road for only 450K which fiqure would be used and do they take into account repairs that are required after purchase?

Thanks

[pqtaxation]

Unfortunately taxation legislation is both voluminous and complicated. Although your questions look straightforward, the answers will depend on a detailed examination of your mother’s and your circumstances - that what you pay a professional to do.

If you want evidence of that voluminous nature just take a look at HMR’s own manuals on capital gains tax (CGT) and on inheritance tax (IHT0):

http://www.hmrc.gov.uk/manuals/cgmanual/index.htm
http://www.hmrc.gov.uk/manuals/ihtmanual/index.htm

So there will be no CGT implications for us or her?

Mother’s sale to you cannot give rise of a CGT liability on you. Whether she has a liability to CGT will depend on her ownership history of the house - if she lived in it as her only residence for all the time she (and her late? husband whose interest she inherited on his death) has owned it then irrespective of whether she gifts, sells at under value or at full (market) value PPR should relieve any realised gain . But it all depends on her ownership history ….

a) No IHT if on death her estate is less than £325K?
b) How would she qualify for £650k threshold if my father has already passed away?

Yes to a). But if she sells the house to you at less than open market value then, as mentioned previously, the difference is deemed to be a gift to you and she has a reservation on the benefit of that gift from continuing to live in the house which value is added to her own free death estate to calculate any IHT payable.

b) concerns transferable nil rate band (NRB) from your deceased father’s estate to your mother’s estate on her future death.

See relevant section of IHT manual http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM43001.htm

So, for example, if your father has previously died havving left his entire estate (including his share of the house) to your mother (so he used up none of his NRB or threshold) then on her later death she will have her own NRB (currently £325k and not expected to increase before 2015) and another one transferred from father (at current value as of date of your mother’s death). So it was how your father’s (or another previous deceased husband’s) estate was bequeathed that determines whether your mother has one NRB (£325k currently) or up to a maximum of two NRB (£650k currently).

would there be any benefit in her remaining on the title deeds?

No, I don’t think so assuming she has no mortgage (which can affect stamp duty payable).

Can I ask who decides Market Value if we aren't using an estate agent to purchase through? We instruct a solicitor to do the conveyancing .....how does the house get valued and does it need to be legally? On various property valuation websites the house is supposedly worth £575K but one recently sold in the road for only £450K which figure would be used and do they take into account repairs that are required after purchase?

The “open market” value (OMV) can only be an estimate --based mainly on its features (size, condition, etc) and sales of comparable properties – whether by an estate agent, buyer, seller, professionally qualified senior member of Royal Institute of Chartered Surveyors (FRICS) or District Valuer (DV who HMRC use). The financial significance of that estimate to you should influence how much effort (and expense) you spend on substantiating the figure you decide to use. For example if your OMV is £450k, you pay your mother £350k and she has other assets of £100k on her death and a full transferable NRB from your father; then her free death estate is 450k, reserved benefit is 100k and NRB £625k so no IHT payable by some £75k (625- 550 ignoring other things); probable that HMRC will agree to OMV without query as no IHT payable by a fair safety margin.

But if only 40% of transferable NRB from your father then IHT payable of £38k ( =40% of {550-1.4*325}). HMRC would then probably investigate the £450k OMV and the District Valuer could say it was £575k increasing the IHT to £88k (=40% of (550+ 575-450-1.4*325}). So to mitigate a £50k (88-38) problem you may wish to have spent say £600 +VAT for a FRICS valuer who could later argue or contest the DV valuation later on if necessary.

However, as a first step, I’d suggest your Mum tells three reputable local estate agents that she is thinking of selling and wants in writing their estimates of the price she could expect (usually 5% -7.5% below the listing price they advise). If three estimates differ by no more than 10% you are probably on safe ground to take the middle point as evidence for the OMV (assuming there is no development potential). If you are going to need a mortgage then a mortgage valuation would be another bench mark if your mortgage company will agree to release a copy to you (though most mortgage valuations are 5 to 10% below OMV). If the house needs substantial repairs then take photographs of its condition to show DV who would use comparable properties in much better condition to argue a higher OMV than you contend.

So it all depends to a number of factors as how imprtant is the OMV estimate: one of which may be how likely is it that IHT is payable on your mother’s death; if that is likely and the estate agents' three free written valuations differ markedly then a professional valuation may be a sensible cost.

[tcaller]

Thank you so much for taking the time to answer my questions so fully.

Just one more

Their wills were both the same, pre 2008 leaving the house and any savings to each other, Does this mean that Dads £325K IHT allowance transfers to my Mum and upon her death the pre IHT allowance is £650k ? She wants to amend her will as there are additional grandchildren around now who need to be included. Will this make any difference?

Thanks

[pqtaxation]

a) Their wills were both the same .... leaving the house and any savings to each other. Does this mean that Dad's £325K IHT allowance transfers to my Mum and upon her death the pre IHT allowance is £650k ?

b) She wants to amend her will as there are additional grandchildren around now who need to be included. Will this make any difference?

Yes to a). Because your father bequeathed on his death his entire estate to your mother, which deemed transfer is exempt from IHT providing she is UK domiciled, he did not use any of his nil rate band and so it will be available to transfer to her estate on her future death (at the future value of the NRB). So her threshold for zero rate IHT will be 2 NRBs - currently £650k until to stay the same until at least April 2015.

b) I'm not clear about your question - what is "this" and what is the "difference". Merely changing her will in future to bequeath her estate to you and her grandchildren (as her husband has previously died) makes no difference to her having a double NRB. But it is possible her will may not need changing if it reads that in the event of her huband pre-deceasing her estate passes in a proportion to her children (as a group either per stirpes or per capita) and in a proportion to her grandchildren (as a group either per stirpes or per capita) -so with the advent of additional grandchildren each one just receives less each.