Struggling with IHT (GWR) scenario (long read!)

[aalindo]

Apologies everyone for this being so long winded, but here goes!

My mother in law owns (outright) a property that (until recently) comprised a farmhouse, stables, 15 acres of grazing land and a redundant brick outbuilding. She lives alone (divorced) and was finding it increasingly difficult to manage the land and the house, which has since fallen into a state of disrepair. She therefore wanted my wife (an only child who will inherit the house eventually) and I to take the house off her hands and ‘bring it back to life’. We approached the Council about planning permission to convert the redundant brick outbuilding into a self-contained granny annexe, which was approved and will be completed within the next few weeks (my mother in law paid for the build). My wife and I have sold our home and plan to move into the farmhouse (we are currently in a caravan on the land!). However, we will need to raise a significant mortgage in order to carry out the required extension/renovation-work on the farmhouse, but we cannot do this without being on the Title Deeds.

One option would have been for my mother in law to sell the farmhouse and some land to my wife and I, whilst retaining some land and the annexe. However, a condition of the Planning Permission is that the annexe and farmhouse (although physically separate) are considered one dwelling that cannot be sold separately. Additionally, knowing the approximate cost of the renovation, we cannot realistically afford to purchase anything at all. Instead, it would need to be gifted somehow.

As I understand it, if my mother in law gifted the farm to my wife and I, but continued to live in the annexe, the gift would be treated as a 'gift with reservation of benefit' and the estate would still be subject to IHT. If we had a large outstanding mortgage it would not be possible for us to pay the IHT bill without selling the farm, thus undermining the whole point of the renovation project.

The questions we have concerns how we can go about mitigating our inheritance tax liabilities, so that the project is still viable:

I’ve looked at the HMRC website and it seems that “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.” This is a possibility as we will certainly be sharing bills as the annexe has entirely separate utilities (and separate access, house name etc.) that my mother in law will be paying for. But what is 50% of the farm? Is it a value/figure, or is it physical? Any physical division of the farm will certainly not be 50/50 as the farmhouse will always be worth more than the annexe and land combined.

An alternative option seems to be for my mother in law to pay us market rate rent. Would this be the rent of a small one-bed bungalow (the annexe), or a 15 acre farm as, again, they are technically one property?

Additionally, of concern is that my wife and I can be gifted a house that is currently worth one sum, spend a considerable amount of our own money on doing it up, and then (when the time comes) ‘inherit’ a house that is worth considerably more and be liable to pay tax on it. It would seem that we are effectively paying twice unless the IHT is calculated on the value of the house before we spent our own money on it. This doesn’t seem to be the case with gifts with reservation of benefit though.

Finally, would it be at all possible to argue that (although the farm is technically a single property with shared stables/land) my mother in law is actually retaining no benefit at all in the farmhouse as she has her own access, utilities etc in the annexe?

Thanks in advance for any guidance/ideas

[pqtaxation]

I have not come across your precise situation before but, as no one else has responded, I’ll give my initial thoughts though I may be distracted as I’m killing time at an airport.

The relevant matters here- which include gifts with reservation of benefit, agricultural property relief (APR), distinguishing legal from beneficial ownership for both tax and planning permission -- are all complex and involve judgement (grey areas). Hence as you appear from your post to know only a little about such matters and the values of the properties and their renovation are clearly material to your respective estates (net assets), I suggest you do not penny pinch and you “invest” a few thousand pounds to get professional advice with respect to all implications of the planning permission, IHT and CGT . It may well be best for your mum in law (MIL) , your wife and you to each receive separate advice that advocates the preferred solution so to give you “collective insurance” if that solution is found to have unanticipated flaws at a later date.

You understandably don’t give any monetary values and any information about your three estates and personal circumstances (e.g. ages and health of each of mum, wife and you, likelihood of you and your wife divorcing etc). Without these it is not possible to comment on the pros and cons of any suggested solution.


Were MIL to be able to afford to do so, one possible (of probably several) solution might be for MIL to gift legal title to all of the property to your wife but with her becoming bare trustee for your MIL of the grazing land (does it produce any income?) and your MIL being granted a “lifetime lease” (until the time she is no longer able to live there) for the granny annexe at market rent (or possibly just a market round rent if she paid for its renovation before which is was demonstrably derelict). Rationale includes gift of house (unlikely to qualify as a farmhouse for APR) and outbuildings would enjoy principal residence relief, house becomes mortgable by you and your wife and you agree with your wife how your beneficial interest will change as renovation costs/mortgage paid off, value of grazing land unlikely to exceed NRB and may qualify in any case for APR and any income is probably best enjoyed by MIL.

[aalindo]

Many thanks for your reply. I have taken your advice and instructed a tax specialist to look into our position.

Any ideas on the more general points, i.e. could/should we be liable to pay IHT on a property that we have invested a significant amount of money in and is it ever possible to argue that no benefit is retained in one element of a property where more than one property exists (e.g. separate house and annexe)?

[pqtaxation]

Good to learn that you will be investing in specific advice on private client law/tax on death estates (for PET/GROB tax law on main house/granny annexe and stable/land) and property law (e.g. scope under to have separate beneficial interests though one legal ownership of land, and alternative ownership structures such ground rent/ long leasehold on annexe).

The recommended solution will depend on the specific circumstances of the property, the planning authority and the terms of its approval as well as those of your MIL and your wife/yourself.

But FWIW my thoughts on what you call the two general points are:
1) even if your MIL were to (choose to ) retain beneficial ownership of all the property and land then with only your residing in and paying for renovation of the house you/your wife would have a part interest in that house so that on your MIL’s death her estate would only include her (part) interest and there would not be a liability to IHT on the value of your part interest begot proportionately to your capital outlay/mortgage payments;
2) if MIL were to gift the house to your wife then clearly the more that can be done to establish the separateness of the annexe from the house (separate utilities, postal address, council tax registration, parking facility etc) the stronger the argument that MIL does not receive any benefit from the house as might also evidenced by a diary of when and why she was there; the land/stable (if she makes use of) may be more problematical with respect to benefit but under the recommend solution she might retain the beneficial interest in those.

Do please tell come back to this board to outline the solution that you decide on as I know of other couples who face similar situations as one parent ages.