Joint ownership and IHT

[khalid]

My wife and I are joint owners of our house. Our unmarried daughter lives with us. We want to include her name as joint owner. All 3 of us would continue to live in the house. Will this make it a potentially exempt transfer for IHT purpose? Will 7 years be counted with reference to 1st death or the 2nd death, of the 2 parents?

[pqtaxation]

My wife and I are joint owners of our house. Our unmarried daughter lives with us. We want to include her name as joint owner. All 3 of us would continue to live in the house. Will this make it a potentially exempt transfer for IHT purpose? Will 7 years be counted with reference to 1st death or the 2nd death, of the 2 parents?

7 years starts from date of gift not the death of you or your wife.


In summary, HMRC’s website gives their guidance on your question at

http://www.hmrc.gov.uk/inheritancetax/pass-money-property/pass-home-to-children.htm#3

.... if you give half of your home to your children, they move in with you and you share bills jointly, the half that you give them won't be treated as part of your estate for Inheritance Tax purposes as long as you live for seven years after making the gift.

More generally, as I understand their position, the (upto) 50% is not be found in legislation, but is a HMRC convention, and if you daughter moves out there can be complications. Sorry I don’t have time now to expand on these points (am at an airport) but perhaps other posters do.

[maths]

The gift(s) of a beneficial interest(s) to your daughter constitutes a PET. However, as you/wife will remain in the house the PET is also a gift with reservation (GWR). This means that on your/wife's death the house remains in your respective estates (and the 7 year rule is irrelevant) and no IHT is avoided.

However, if certain conditions are satisfied the GWR will not apply and once you/wife survive 7 years from date of gift no part of the interest transferred remains in your/wife's estates.

The conditions are:

1. all of you continue to live in the property.
2. you/wife receive no benefit from donee (daughter). Typically, this means you each pay your own share of household running expenses.

The % interest often transferred to the donee is 50% but may in my view be a little higher; unfortunately there is no explicit legislation on this figure.

No CGT should arise on the gift (assuming you/wife have always lived in the property).

[khalid]

Dear Maths

Thanks for your reply. I am afraid, you have misunderstood the question.

The house is already owned jointly by me and my wife. After gifting, It will become jointly owned by 3 of us. On 1st death it will be owned jointly by 2 of us. On 2nd death, assuming our daughter is the last survivor, she would be the sole owner. If it is PET, will the 7 years be counted (from the date of gifting) to 1st death or 2nd death?

[maths]

Thanks for your reply. I am afraid, you have misunderstood the question.

The house is already owned jointly by me and my wife. After gifting, It will become jointly owned by 3 of us. On 1st death it will be owned jointly by 2 of us. On 2nd death, assuming our daughter is the last survivor, she would be the sole owner. If it is PET, will the 7 years be counted (from the date of gifting) to 1st death or 2nd death?

No, I haven't misunderstood the facts.

The 7 year rule may not be relevant (i indicate above when this is the case).

Assuming the 7 year rule is in point the period commences at the date of the gift by the relevant parent. Thus, for example, if father gifts say 30% to daughter and the 7 year rule applies, then IHT may arise on the gift if death of the father occurs within 7 years.

Similarly for the mother.

Each parent makes their own gift and the 7 year rule applies to each separately.

[pqtaxation]

No, I haven't misunderstood the facts.

...The 7 year rule may not be relevant (i indicate above when this is the case).

Assuming the 7 year rule is in point..

As maths indicates, the facts do seem clear here but khalid's last post may just reflect his/her understanding of both taxation law as well of the words (some may call it jargon) that professionals use who work in that area. That understanding may not be where maths supposes.

I would guess that khalid may not be aware of the difference between joint tenancy and tenants in common when owning a house. A layman might quite reasonably be confused by the use of the word “tenant” in the context of ownership.

If my guess is right then Khalid should read up about the difference so as to learn that first of all the two spouses should become be tenants in common to be able to each gift a portion of his and her interests to their daughter. The numbers are usually (but need not be) to become 50%/50% tenants in common before gift and each spouse gifting 1/3 of his/her 50% interest to end up with spouse1/spouse2/ daughter each owning 1/3.

As maths says the gift of 1/3 of 50% each is a potentially exempt transfer PET (because made to a person, the daughter but it is a gift with a reservation of benefit GROB (because each spouse continues to live in the house) though the GROB condition does not apply if daughter continues to live in house and pays her share of costs in proportion to her ownership (which may not necessarily be 1/3).

As khalid should use a solicitor to prepare the necessary paperwork and I’m falling asleep, then hopefully khalid now has sufficient understanding for a layman to approach such a solicitor about this approach to mitigating IHT on parents’ deaths. Such mitigation is only achieved if both spouses were to die and their combined estates (including the house) are valued at more than £650,000 (twice the nil rate bands at time the surviving spouse dies). If say on their deaths the house is worth £360,000 (as it was say at time of gift) and their two total estates are worth £750,000 then the mitigation benefit of the daughter having been gifted earlier a 1/3 interest, assuming both parents lived for more than 7 years after date of gift and GROB not applicable, is to reduce the estates by £120,000 (1/3 of value of house at time of deaths) assessable to IHT from £750k to £630k which saves £100k (equal 750-650)*40% = £40k of IHT.