My wife, son and I share my mother's house with her. My mother is 82 and registered as disabled with severe asthma. My wife is a carer for her. The house in which we live has a value of 1,000,000 and is her only asset. We hope to continue to live here if anything happens to her. However it seems that the inheritance tax (IHT) bill would currently be about £280,000. My father passed away 14 years ago. An insurance policy does not seem to be an option due to age and health. Any ideas, please?

Mark McLaughlin CTA (Fellow) ATT TEP, General Editor of TaxationWeb, selects a 'question of the month' from TaxationWeb's Tax Tips Forum.

Introduction

Very often, an individual’s tax position is the result of actions they take voluntarily (or are considering taking), and their circumstances are largely controllable. However, occasionally tax implications flow from personal circumstances, or possibly those of a family member. It seems unfortunate that in cases involving care for the elderly or sick in particular, the parties involved are forced to consider tax issues rather than concentrating on the things that matter most. The following query perhaps provides a good illustration.

Query from TaxationWeb visitor (‘peterty95’)

My wife, son and I share my mother's house with her. My mother is 82 and registered as disabled with severe asthma. My wife is a carer for her. The house in which we live has a value of 1,000,000 and is her only asset. We hope to continue to live here if anything happens to her. However it seems that the inheritance tax (IHT) bill would currently be about £280,000. My father passed away 14 years ago. An insurance policy does not seem to be an option due to age and health. Any ideas, please?

Editor’s Comments

The contributor (‘peterty95’) confirms below that his mother has a valid Will, and that the house is being left to him. As the responses below indicate, a lifetime gift of the property to her son would seem to be a ‘potentially exempt transfer’ (PET). However, the contributor indicates that his wife is a carer for his mother. Could it be argued that the transfer of a property represents consideration for the provision of care?

Even if the transfer of the property is a PET and assuming that the contributor’s mother survives at least seven years, the ‘gift with reservation of benefit’ (GROB) rules must be considered. If the gift is caught by these IHT anti-avoidance rules, the effect is that the gifted property remains part of the donor’s estate for IHT purposes. The response by ‘cta’ below suggests one possible solution to the GROB rules. Note in particular that the donee must not pay more than their fair share of household running expenses. In addition, the suggestion is made to transfer a two-thirds interest in the property. The transfer of anything more than a half-share of the property may attract the attention of HM Revenue & Customs (see their Inheritance Tax Manual at paragraph 14332), although the guidance does not go so far as to say that transferring more than a half share is unacceptable. 

Other possibilities to consider might include commercial borrowing against the property, and giving the proceeds away. Cash gifts made directly to other family members will be PETs, and so will not be completely exempt from IHT for seven years. Certain types of investment are also ‘IHT-efficient’. See also the Tax Clinic for January 2007 on Discounted Gift Trusts. However, as stated many times previously in the Tax Clinic, it is strongly recommended that specific professional advice is obtained before considering IHT planning.

Responses from contributors included:

‘cta’ said:

If the bill is £280,000, I assume father left his half share of the house to your mother?

Your mother could make a gift of two thirds of the property to you and your wife, in the hope that she survives seven years. There should be no CGT since it is your mother’s home and no stamp duty since it is a lifetime gift.

You and your wife will need to pay two thirds of the running costs to make sure there is no gift with reservation of benefit for IHT purposes.

Providing your mother lives for seven years, two thirds of the property will be outside of her estate, and the level of IHT will depend on the value of the property and the Nil Rate Band at the time.

If mum does not survive for seven years, but does for 3 or more years, there will be some tax, but this will be reduced by taper relief (IHT taper, not CGT).

Complications may arise if you move out. There would be a need for commercial rent to be paid etc.

You would be best to take professional advice on this one, and you will also need to take into account the provision of care for your mother which is really the most important thing.

‘peterty95’ replied:

Thanks for your quick reply. My father did leave his share of the house to my mother as he died suddenly and had a standard will leaving everything to my mother. My mother’s will is basically the same leaving the house to me. I have been contacted by an IFA who has suggested a mortgage which would then be put in a trust which would be run by some independent firm which would pay the mortgage off on death themselves and take their costs out of the trust fund. However, I am not comfortable with this as I believe it could lead to an even bigger bill. My mother wishes to stay in this house as do I and we would continue to help with anything she needed.

‘cta’ said:

I am wary of mentioning equity release, particularly now mortgage products are so heavily regulated.

Typically, the interest rate will be higher than for a normal mortgage, and in most cases no repayments will be required so the loan balance steadily increases. The hope is that house price increases will outstrip the increase in loan, but who is to say?

Even then, the seven year rule will still apply to the money raised from the equity release if it is given away.

In my opinion, the fact that you live with your mother is too good a tax planning opportunity to miss.

Take advice though.

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