Joint Tenancy and IHT

[WDD]

My Sister-in-Law and her husband are selling their Principle Place of Residence and contributing 25% of the sale into a new property in which my Wife and I will jointly live with them. The 25% cash contribution represents 12% of the new property value.

1. Does the 25% cash contribution represent a gift?
2. Can IHT be avoided by creating a Common Tenancy and allocating proportional shares?
3. Upon their deaths, can the In-Laws 25% contribution plus any proportional capital gain be disbursed to their children by my Wife and I from savings, but without being classed as a gift, assuming always that the prevailing IHT threshold is not breached?

Regards

[Lee Young]

Who are the legal owners of the new property and more importantly who are the beneficial owners and in what proportions?

[WDD]

There are no legal or beneficial owners at present as the new property has not yet been purchased. The proportional split in terms of cash contributions to the purchase price would be approx 85% from wife and I and 15% In-Laws.

[Lee Young]

The difference between the 25% they are paying and the 15% they are receiving is therefore a gift for inheritance tax purposes.

IHT will only be payable for each couple if (in simple terms) their estates exceed £650,000 |(Or £900,000 if they have children). How your in laws want their estate dealt with on their deaths will be determined by their wills. If you don't want to sell your house to fund the payments to their beneficiaries then you will probably have no choice other than to buy out their shares of the property when the time comes.

[AGoodman]

If they give you the money, it's a gift (possibly a reservation of benefit or, if not, probably pre-owned asset tax - a form of income tax charged on a deemed rental value)

If they transfer 15% of the purchase price (including stamp duty) and receive 15% of the property as tenants in common, it's not a gift.

I fear that the only way to avoid both IHT and POAT on the 15% share (assuming their estates are valuable enough to pay IHT) is for the gift to qualify under s.102B Finance Act 1986 (gift of share of interest in land). That in itself looks to be very difficult as they first need to own a share in the land and then make a gift to you. HMRC will usually accept this where, say, they owned the whole and gifted half when you moved in. It is less clear if they owned a small portion and gifted most or all of it to you - HMRC could well oppose and I suspect it is not worth the trouble.

Assuming you go for the second route and the in-laws own the 15%, they could include an option in their wills allowing you to buy it from their estate. Absent the option, you could still buy it from the executors (whoever they may be). That would not be a gift from you. The third possibility, which may be neater, is to include an option in the declaration of trust creating the tenancy in common.

[maths]

The new property is a joint purchase. No gifts appear to be involved.

In-laws contributing 15% of the purchase price of the new property.

You and wife 85%.

All four of you are to live in the new property.

The assumption must be that you/wife own beneficially 85% and in-laws 15% tents in common. Any different ratios may involve gifts.

In-laws in their wills leave their 15% to their children. You could then purchase their share from them or the in-laws executors.

If you are uneasy about relying on their children to sell their 15% on in-laws death then an option may be the answer.