Inheriting Rental Property

[sandy2000]

thank you for concurring on this..

So now we have two formulae (one above and one given by 'someone" for dividing the value of 50% share in the estate -- although division of "worthless" share seems insignificant but the two methods give a different outcome (eventually):

1- divide over NET value
children: 325/400 = 81%
mother/widow: 75/400 = 19%
and dividing 70k debt in 81:19 ratio between them
So (ignoring rise in property value) eventually when they have paid the debt off the division would be equivalent of 382k : 88k
In this model, the ratios change with change in value of debt - and at 145k debt (where estate's net value = NRB) mother gets 0 value and 0 debt to redeem

2- divide over Gross Value
children: 325/470 = 69%
mother: 75/470 = = 31%
and dividing 70k debt in 69:31 ratio between them
So (ignoring rise in property value) eventually when they have paid the debt off the division would be equivalent of 373.4k : 96.6k
In this model, the ratios do not change with change in value of debt - and at 145k debt, mother gets 0 value share but still gets a 31% redeemable debt (and under lying equity to be released on redemption) of about 44k

Is there any technical reference which could confirm which model is indeed the preferred/correct way of deciding the relative share.
As the two out comes have a significant difference.

[someone]

2- divide over Gross Value
children: 325/470 = 69%
mother: 75/470 = = 31%

This isn't what I meant.

75/470 is 16% with 15% still unaccounted for (the remaining part has a net value of zero)

the children get 325/400 of the equity, the mother gets 75/400 of the equity and you can do with the indebted portion as you please.

If you want to share the debt plus property remaining piece in the same proportion then that is fine. I have no idea if that is required. (but gives the same answer as 1)

But if the children take on a share of the debt in return for a share of the property then isn't that, by definition, consideration and hence SDLT might be in scope. And if they don't take on the debt but get more than 325/470 of the property then their inheritance is more than 325k so presumably IHT is due.

My guess, and it's only a guess, is that if this is a second property for one or more children then they should take 365/470 and 40k of debt (assuming the children want to maximize their stake for minimal tax now) and the mother take 105/470 and 30k of debt. Whether that is possible at law I have no idea. I have this idea that the share of the debt has to follow the ownership proportions BICBW.

[sandy2000]

5/470 is 16% with 15% still unaccounted for (the remaining part has a net value of zero)

Thank you for clearing that up

My guess, and it's only a guess, is that if this is a second property for one or more children then they should take 365/470 and 40k of debt

(but my guess would be the mother in the same way she (presumably) inherits everything else that has no value)

The children may have to pay higher rate SDLT if they take on a share of the mortgage.

And the 40k limit of 2nd property would still apply even if the mortgage is not being officially transferred?
And would there be no SDLT if all of share of debt had been considered to be passed onto the mother instead?

[bd6759]

SDLT is not payable. Consideration does not include a secured debt is these circumsatces (an inheritance). (Para 3A, Sch 3, FA 2003) (and note, the drafters got mixed up and there are 2 paras 3A! One covers this scenario and the other covers dissolution of marriage).

[sandy2000]

Would that be this Para4 now?
https://www.legislation.gov.uk/ukpga/2003/14/schedule/3/paragraph/4

Also in the SDLT guidance it says:
If you’re left land or property in a will
If you get land or property under the terms of a will, there’s no need to tell HMRC and you won’t pay SDLT. This applies even if you take on an outstanding mortgage on the property on the date the person died. This is on condition that no other consideration is given.

[bd6759]

No

It would be the para 3A that was inserted by s300 FA 2004 - https://www.legislation.gov.uk/ukpga/2004/12/section/300

Not to be confused with the para 3A that was inserted by Reg 174 Tax and Civil Partnership Regulations 2005 SI3229/2005 -https://www.legislation.gov.uk/uksi/2005/3229/regulation/174/made )

[sandy2000]

It would be the para 3A that was inserted by s300 FA 2004 - https://www.legislation.gov.uk/ukpga/2004/12/section/300

Thank you, bd6759, much appreciated.