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Where Taxpayers and Advisers Meet

If I buy a house for my father will there be inheritance tax involved?

mankell
Posts:2
Joined:Wed Aug 06, 2008 2:18 pm

Postby mankell » Wed Jul 02, 2003 4:34 am

My father is living with me at the moment and as I wish to sell my house he will need rehousing. There is enough equity in the house I`m selling to purchase a small house for my father as well as a seperate house for myself. My solicitor tells me there is a possibility of serious Inheritance Tax consequences if I do this.
Could someone please explain what he means?

Thanks in advance,
Bertram

accountant@uktaxshop
Posts:550
Joined:Wed Aug 06, 2008 3:04 pm

Postby accountant@uktaxshop » Wed Jul 02, 2003 6:50 am

What he means (and if your solicitor canÂ’t explain this I would be looking around for a new one!) is that if you buy your father a house, when he eventually dies it may become part of his estate, and therefore liable to IHT, depending on how the financial arrangements are structured.

If your father’s estate is worth more than £255k, the excess will be taxed at 40%.

It is possible that instead of your fathers IHT, you would be liable for CGT if you sell it after your father passes away. This would be computed based on the buying and selling prices, with a taper relief allowance applied. It may therefore be somewhat less than any IHT, depending on the size of the rest of his estate.

It is worth some proper planning to establish the best route for you, from a CGT and a IHT point of view. Your solicitor should (I would hope) be able to help you on this, and help you plan the most efficient route, taking into consideration both taxes. There are quite a few options in this area. If your solicitor starts talking telephone number fees, I have a good contact who (despite being city based) gives a good quality and reasonable priced service in this area.

James Smith
Chartered Accountant
www.uktaxshop.co.uk
01284 764436

mankell
Posts:2
Joined:Wed Aug 06, 2008 2:18 pm

Postby mankell » Wed Jul 02, 2003 8:10 am

Thanks for your prompt reply James.
As the house I am buying for my father is costing just £90,000 and he has no other assets, apart from a few small pensions for income for life, I doubt if his assets will ever exceed £255k. (unless he wins the lottery).
Thanks again,
Bertram.

accountant@uktaxshop
Posts:550
Joined:Wed Aug 06, 2008 3:04 pm

Postby accountant@uktaxshop » Wed Jul 02, 2003 8:41 am

In which case Bertram, it would probably be best from a pure tax point of view for you to gift the property to your father, and let him occupy it as his main residence.

If for some reason it is sold in his lifetime there will be no CGT liability as he will be able to claim sole residence. If it remains in your name, there would probably be CGT to pay on any gain at that time.

This arrangement would of course need to be considered again in the apparant unlikely event that the value of his assets rises toward the IHT limit.

Regards

James Smith
Chartered Accountant
www.uktaxshop.co.uk
01284 764436

accountant@uktaxshop
Posts:550
Joined:Wed Aug 06, 2008 3:04 pm

Postby accountant@uktaxshop » Wed Jul 02, 2003 8:45 am

Sorry, let me rephrase that,

I shouldnt have said "gift the property to your father"

it should be "gift your father the funds to buy the property in his name"

You dont want to be paying stamp duty twice.

Taxbar
Posts:1187
Joined:Wed Aug 06, 2008 2:19 pm

Postby Taxbar » Thu Jul 03, 2003 1:46 am

Dear Bertram,
excuse me for intervening in this discussion but there is a simple solution that seems to be eluding the other contributors.

Since the money is yours it would be foolish to pass it back a generation to your father. This will involve a gift by you and is in fact unnecessary.

The correct way of structuring this arrangement is to buy both houses in your name.

To avoid Inheritance Tax complications and Capital Gains tax complications you can give your father a life interest under what is known as a "revertor to settlor trust ".
The property then is yours for Inheritance Tax Purposes, but benefits from the only or main residence exemption when a trust beneficiary occupies it as such.

I hope this helps,
Daniel Feingold
Barrister-at-law(NP)
Editor UK & International Tax law Section of Taxationweb. You can contact me via my section of this site.


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