father & son joint tenants to avoid IHT?

[jooliona]

if a father (age 65) and son (age 30) become joint owners of their family home, either by tenants in common or otherwise, can this help to reduce/avoid tax on the death of the father? there is no spousal contribution as they divorced >20 years ago and she died a few years later, so only the father's IHT allowance applies, and the property is certain to exceed this value.

i assume in the case of joint ownership, the home would automatically be owned 100% by the son and therefore no IHT will be due? capital gains will not apply either if he owns no other property and continues to reside at this family home until the father's death?

if tenants in common, only the share left by the father to the son in his Will would attract IHT above the threshold, and/or capital gains tax? the tenants in common split does not have to be 50-50 it could be biased toward the son to minimise the father's asset value?

which is the best option in this case? evidently a 7 year time period is required for either of these to qualify, and the only real difference is that as TIC father could choose to pass his share to someone else in his Will. is it possible to switch between TIC and JT within the 7 year time frame or would the counter reset and another 7 year time period be needed after any change? also if father died before the 7 years passed, the whole estate would still be liable?

would this arrangement be safeguarded by a mortgage held in both names, or would this raise a CGT issue as effectively selling part of the home to his son? there is a need to raise capital now to carry out essential repairs on the building and the son will contribute towards this. also if the house were to be sold prior to the father's death would either of them be liable for capital gains tax?

thanks,

[Lee Young]

For the purposes of this posting I am assuming that father and son do not live together. If they do then the answer would be slightly different.

The gift by father of half the house to son would be known as a gift with reservation of benefit. Father would carry on living in the whole property whilst only owning half. Therefore when he dies,whenever that may be, he will be taxed to IHT as though he owns the entire property, not just half. Makes no difference whether this is joint tenants or tenants in common.

Father can avoid the gifts with reservation of benefit trewatment if he were to pay son rent for occupying his (sons) half of the property for as long as he (father) lives there.

If they own as joint tenants then on first death the property would pass automatically to the survivor - IHT payable (ie if estate including the property exceeds in value terms the nil rate band available) in the usual way. If they held as tenants in common then the terms of the deceased's will determines where the deceased's share goes, but again IHT payable in the usual way.

Therefore whatyou are suggesting does not achieve what you hoped.

[Peter D]

Hi Lee, I read this as though the Father lives in the same Property with the Son. I advised the OP to post on here after me addressing the issue on another forum, glad you picked it up. Regards Peter

[jooliona]

of course father & son are living in the same home, that is why i said "he owns no other property and continues to reside at this family home until the father's death". does this help the situation?

[Lee Young]

Actually you wrote "if he owns..." but never mind

As they will be living in the property any gift of a share of the property to the son will be a PET in the usual way provided son pays only his fair share of the outgoings - ie he doesn't pay more than the proportion of the propoerty he now owns. If he did this would be a gift with reservation of benefit.

If son ever then moves out of the property the gift will automatically be converted into a gift with reservation of benefit unless the father then pays the son a market rent for occupying son's proportion of the propoerty. This he must do for as long as he lives there, not just seven years.

The share of the property retained by father will remain in father's estate and be taxable to IHT in usual way; the amount given away will, assuming the gifts with reservation of benefit rules apply, reamin in his estate for the 7 year run off period.

[Peter D]

I assume there will not be a lifetime interest in possession declaration involved as this would trigger the gift with reservation of benefit again. The share to the Son must be unconditional. Regards Peter

[jooliona]

the clue was in the word "continues", implying that he already lives with his father. i can only apologise for not having the comprehension of every last relevant detail that might be required. i am a simple person asking for a simple answer to what should be a simple question!?

so, in conclusion, if they become joint tenants then technically the whole property turns over to the son on the father's death but therefore the whole property is still liable for IHT and nothing is gained?

if they become tenants in common, split everything to do with the house 50-50, both continue living there and owning no other property for the next 7 years, then father subsequently dies, after that time then only 50% of the value of the property attracts IHT? if father lives beyond these 7 years could either the father/son then move out and still retain the benefit of this arrangement? or must they continue living together until the father dies, whenever that may be? i am thinking of whether the father may need to move to a care home or such like if his health deteriorated later.

if father dies before the 7 year period everything comes under IHT as before.

if, as you say, the son were to move out before the 7 years is up it goes back to being a GWROB and another 7 years must pass before it is no longer considered part of father's estate? or does it never pass out of his estate unless father pays son rent for the other half?

[Lee Young]

The conclusions are not quite right.

If they own as joint tenants the deceased's share of the property will be in his estate for IHT purposes; the other half will only be in the estate if he dies within 7 years of the gift (and it will be the value of the gift, not the value of what was given away when the father died - ie if it goes up in value the increase in value is outside the estate also), or beyond 7 years and the revenue find it is a gift with reservation of benefit in which case the value of the whole is still in the estate.

As stated if father survives the 7 years and then the son moves out the gifts with reservation of benefit rules will apply to the half given away unless the father pays a rent to the son. If father moves out this does not affect the arrangements. The gifts with reservation of benefits rules only cease once a market rent is being paid, and then from that point another 7 years must pass before the gift falls outside the estate. Even once the 7 years passes the father must still pay rent if he is occupying the property.

[jooliona]

i give up. this is beyond my tiny brain. we'll just have to pay through our noses and look happy i suppose. thanks anyway.

[Peter D]

I do not know why you 'give up' I understand it. Perhaps you have gone off to watch the men's final tennis came. Read Lee's response when you have a clearer head, I am sure you do not have a tiny brain. Regards Peter