Buying house from parent

[jvs1611@hotmail.com]

Hello
My father has a freehold house & want's to release a little cash, rather than using an equity release plan he is suggesting that he sells the property to me (his son) at a very low price & then continues to live in it.
Can we do this?
What about IHT ? Current valuation approx £230K
Does capital gains come into this?
And advice gratefully rec'd.
Thanks

[accountant@uktaxshop]

You can do it - but it could get expensive depending on how you do it.

From a tax point of view a sale under value between connected persons is treated as if it occurred at the full market price.

There would be no initial CGT if this is (and has always been) your fathers main residence, however the second it becomes yours, you will start having a liability based on any gain, which would crystallise when the property is eventually sold.

In addition there would be a charge to stamp duty, based on the market rate at transfer and there is the possibility the house could remain in your fathers estate (yes really).

You need to be very careful in this area, as your father is remaining in the property.

The "normal" route would be to place the property in trust. If done properly this means on his death you receive the property free of IHT. This also avoids an early charge to stamp duty, and allows the use of your fathers PPR exemption to CGT while he is living there.

To set this up would cost somewhat less than the initial £2300 of stamp duty due.

You would then simply gift you father the funds that he requires.

If you would like to know more, please let me know. I have a contact who does this sort of planning all day.

Regards

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

[Ian McTernan CTA]

Have you considered selling a proportion of it for full market value, i.e. enough to release some funds and use some of the PPR exemption? Dependent on your father's estate this may be the simple solution as he spends the money it reduces the estate.

You will still have a CGT problem but at least the IHT 'gifts with reservation of benefit' rules will not apply as 1. there was no 'gift' and 2. he will actually own the majority of the property and have a right to occupy it.

Ian McTernan CTA
McTernan Associates Ltd
Chartered Tax Advisers
ian@imcternan.com

[no-gain-tips]

Depending on the age of your father, another consideration is Care Fees. It maybe construed that placing the property in Trust could amount to deprivation of assets, for the local authority. Test cases have been won successfully, however I am not sure that a test case has arisen for the Trusts outlined. The local authority have no time limit on how far they may go back to check on the transfer of assets. It doesn't answer your concern but raises many issues on whether these transfers into Trusts, for principal private residences (which are now popular, because the recent Eversden loophole has ceased) are deemed as deprivation of assets,in the eyes of the local authority. A question I can't answer is can the Trust be attacked by the local authority in the event that your father incurs care fees ?