Gifting house without reservation

[londoncalling]

Hello,

I am currently living with my parents at our family home and we were thinking of ways to reduce the estate that would be liable to IHT.

If for instance my parents were to gift me a £500,000 share of the property and I lived with them in the house for 7 years am I right in thinking that this would no longer be a gift with reservation as its also my primary residence and also if I contributed towards utilities/upkeep etc?

Furthermore if we wished to sell the house after 3/4 years and buy a different one would the gifting period continue as I would also be living with them in the new house.

Many thanks to anyone who can offer some insight into this.

[Lee Young]

The scenario you describe is fine, until you move out of the shared property. Once you move out - whether within the seven year period or after it - your parents would then have to pay you market rent for occupying your share of that property (and potentially any replacement property). If they don't pay rent at the market rate then the IHT avoidance "gifts with reservation of benefit" rules will apply from that point. If at a later date they do remedy the situation and begin paying you rent, the seven year period starts again from that date, not from the date of the original gift.

In short, if they are going to enter into this assort of arrangement for IHT saving purposes, take expert advice before doing so. Depending on their individual circumstances, they may have better options.

[londoncalling]

Hi Lee,

Many thanks for your input just to clarify would that still apply if I was continuously living with them in one property or another for the 7 year period i.e. after 3/4 years if we sold the current house and moved into another and I continued living there as my primary residence?

Thanks

[londoncalling]

Sorry I should have made that a bit clearer, I understand that even if I moved out after 10 years they would need to pay me the market rent of my share my point was more that if we moved houses after 3/4 years and I continued to live with them in the new house would the gifting period be reset or carry on as its likely that I will stay with my parents through old age and am more concerned with ensuring the 7 year IHT free condition is met.

Thanks

[LozaACCS]

Not sure I would entirely agree, although I would welcome further comment.
You are confusing the 7 year rule for a PET with the relevant period for the GWR rules, the gift from your parents is certainly a PET subject to the normal 7 year rule.
The gift will not be a GWR providing your parents do not receive a significant benefit (say in excess of 50% of the living expenses) from you.
The relevant period for GWR purposes is the last 7 years of your parents lives, or if less, the period from the gift to the end of their lives.
When you move to another property the tracing rules treat the new property as effectively standing in the shoes of the old property, since that was a gift of an undivided share of an interest in land, then I would suggest the same treatment applies to the new property (Sch 20 (2)(1) FA 1986), as a consequence there would not be a GWR

[londoncalling]

Hi Loza

Thanks for your input.

Just to clarify as this is the first time I have dealt with such matters, if my parents were to go ahead and gift me a £500,000 share in the property provided that I lived with them in the house as my primary residence and contributed no more than 50% of the utilities upkeep of the property after 7 years have passed that £500,000 share would now fall out of their taxable estate as it was a PET?

If so would that essentially mean that I could even move out of the house after 7 years and they would no longer have the requirement of paying me the market rate for my share in the house?

Many thanks for any insight on this.

[LozaACCS]

No, I do not believe that is the case.
There is no GWR on any property (in my opinion) as long as you continue to meet the condition regarding shared occupation at S102(B)(4) FA 1986.
As soon as you vacate any property the condition is no longer met and a GWR arises to the extent of the value of the original gift, since your parents will be living in the property, in order to escape a GWR they would need to have not had any benefit (ie not occupied the property) for more than 7 years before their death.

[londoncalling]

Thanks for the clarification.

Would I be correct in saying that gifting a share this way is essentially a PET and a potential GWR and as long as 7 years have passed for it to be a successful PET and I stay with my parents until they pass it will also not fall under a GWR and be out of their taxable estate?

There is one other option that we also have, I created a self contained studio flat on the ground floor of our house (planning permission/ building control signed off etc) so the property is now a flat and maisonette and I was planning on creating a leasehold for this flat so that I could then get a BTL mortgage and my parents would receive the money (250k)

Would it be better for them to then gift that money back to me and I use that to buy a share of the maisonette we live in instead?

From some reading I have done I think they may be liable to income tax on the portion of the market rent that would be due for my share?

If so this may be preferable as the market rent for my 250k share would be around 10k per year and as they don't have any other form of income or a large pension the income tax due would be quite small and preferable as it would remove the GWR potential that arises in option 1?

Many thanks

[londoncalling]

I have done some further reading and from what I understand if my parents were to go ahead and gift me the 250k proceeds from the sale of the flat to me and I in turn use that to buy a share of the house that we all live in it would fall under POAT?

If so would I be correct in thinking they would simply declare the rental amount they would get for my % share of the house and pay income tax on that amount?

I just want to ensure that IHT or GWR etc don't over rule such a transaction taking place?

Many thanks to anyone who can help clarify that point.