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Where Taxpayers and Advisers Meet

Main residence

Yiannis17
Posts:133
Joined:Wed Aug 06, 2008 3:43 pm
Main residence

Postby Yiannis17 » Wed Apr 04, 2018 10:25 am

Morning

In respect of tax planning on a main residence valued at 3m. Would be possible for the elderly couple who currently live there and hold the property as joint tenants, to transfer/gift a portion of their home to their three children, say an amount of £325k or 650k equally. Two of the children/adults are also still resident there.

Is the transfer seen a PET for the couple? In addition to any other transfers recently made out of the estate.

The idea is to have the two children who also live there as having a share of the PPR, as it the case.

Is it ever possible to have a large portion of the property held as joint tenants between the elderly (as is the case) and balance held as tenants in common between the three children? In this case the portion held under joint tenancy after the above transfer say 2.675m, would pass over to the surviving spouse on the first death.

The child/adult not living there would also need to pay market value rent on there portion of the property if my understanding is correct.

Thank you

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Main residence

Postby maths » Wed Apr 04, 2018 3:52 pm

The gifts by each parent (presumably equal) to each of the 3 children constitute PETs.

However, as parents continue to reside in the property the gifts constitute gifts with reservation the effect of which is that no part of either parent's estate has been reduced for IHT.

But as the parents and two of the children will reside in the property no reservation arises with respect to the parental gifts to two of the children assuming expenses of the property are shared (or paid for by the two children).

With respect to parental gifts to the child who does not reside in the property this will constitute gifts with reservation unless the parents pay a market debt to the child in respect of his/her share.

Once all gifts have been made the parents may hold their remaining respective shares as joint beneficial tenants whilst the three children hold their shares as beneficial tenants in common.

AGoodman
Posts:1738
Joined:Fri May 16, 2014 3:47 pm

Re: Main residence

Postby AGoodman » Wed Apr 04, 2018 5:10 pm

As Maths said, but the values you suggest are a bit misleading. If you are going to do this to save IHT then it would be sensible to gift much larger sums - e.g. 1/5th of the property to each child. There is no great benefit to the sums you suggest. If there is a substantial risk of the PET failing then you need to balance that risk against the CGT payable by the child not in residence on a future sale.

Yiannis17
Posts:133
Joined:Wed Aug 06, 2008 3:43 pm

Re: Main residence

Postby Yiannis17 » Thu Apr 05, 2018 10:53 am

Thank you both for your helpful response.

AGoodman, the PETS where estimated as such because the couple is quite elderly and they have made gifts of around 175k each to their children over the past 3/4 years.

Kind Regards

AGoodman
Posts:1738
Joined:Fri May 16, 2014 3:47 pm

Re: Main residence

Postby AGoodman » Thu Apr 05, 2018 11:12 am

Understood but:

1. If they survive the seven years, you would kick yourself for gifting a smaller amount
2. If they fail to survive the seven years, the full amount (gifted now and retained) will all come into charge anyway, so the size of the gift is irrelevant.

I don't see any benefit to a smaller gift (at least from a tax perspective).

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Main residence

Postby maths » Thu Apr 05, 2018 1:05 pm

The making of a PET is designed to reduce IHT on the death of the donor. This works if the donor survives 7 years (or for more than 3 years due to taper relief).

Where the above would not work is if, for example, the lifetime gift was of a residence (no reservation of benefit) and death occurred within the first 3 years because there would be a loss of the residence nil rate band on death.

EG
Estate worth 450k includes house worth 350k.

In the absence of a lifetime gift IHT on death would be 40% of [450k - 325k -100k] i.e. 10k

Assume lifetime gift of house (no GWR) and death within 3 years.
IHT on PET 40% x [350k - 325k] ie 10k
IHT on death estate 40% x [100k] i.e. 40k.


In the present case nothing is lost so long as on death sufficient amount of the house remains to absorb the residence nil rate band.

kebata
Posts:27
Joined:Tue Feb 21, 2012 7:10 am

Re: Main residence

Postby kebata » Fri Aug 10, 2018 1:18 pm

Could I just check - if one gives a share of a main residence to a child to reduce IHT as a potential PET and retain a majority share in the name of husband and wife but pay a market rent to the child in respect of their share - on the death of the husband and wife would the new main residence additional IHT tax relief apply?

Thank you

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Main residence

Postby maths » Fri Aug 10, 2018 2:00 pm

The payment of rent should avoid the reservation of benefit problem re the % given to the child. Thus, after 7 years the gift (a PET) would no longer be potentially chargeable assuming rent continues to be paid.

If say 30% given to child and 70% retained then on parents death if the 70% left to child the new residence nil rate band will apply to parents' estates.

kebata
Posts:27
Joined:Tue Feb 21, 2012 7:10 am

Re: Main residence

Postby kebata » Fri Aug 10, 2018 2:39 pm

Thank you - yes I understand...……….the rest of the property has to be left to the child to qualify for the 'new' allowance.

Yiannis17
Posts:133
Joined:Wed Aug 06, 2008 3:43 pm

Re: Main residence

Postby Yiannis17 » Mon Aug 20, 2018 2:01 pm

Afternoon,

If I may back track on this one to Mr A Goodman's reply of 05/04/2018 at 10.12am.

Point 2 states that should the transferor not survive the seven years, then the full amount gifted and retained will become chargeable. Just to summarise, elderly husband and wife transfer say 500k of their main residence valued at 2.5m to their sons who still reside with them, so no gift with a reservation assuming they pay the bills etc. Is this point stating here that should death happen within seven years then the 500k and 2.0m wil be laible to IHT? I can't see that.

When the transfer of 500k is done could a Flexible Life Interest Trust not be set up whereby on the first death the balance of say half of the 2m will be transferred free of IHT. It is only when the second spouse dies that the 2.0m home less the IHT amount of 650k is taxable. Plus the 500k less taper if seven years is not reached.

Is my understanding correct?

thank you.


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