This site uses cookies. By continuing to browse the site you are agreeing to our use of cookies. To find out more about cookies on this website and how to delete cookies, see our Cookie Policy.
Analytics

Tools which collect anonymous data to enable us to see how visitors use our site and how it performs. We use this to improve our products, services and user experience.

Essential

Tools that enable essential services and functionality, including identity verification, service continuity and site security.

Where Taxpayers and Advisers Meet

equity release and IHT

shhhhh
Posts:1
Joined:Wed Aug 06, 2008 3:05 pm

Postby shhhhh » Sat Sep 20, 2003 4:00 am

My parents own a property on which they have no mortgage which is practically derelict but they are planning to renovate. Property in the area has risen dramatically and we are concerned that once completed this property will be worth about £500k and there would be a large inheritance tax bill to pay one day. One option I am considering is if I purchased 50% of the property from them (as in an equity release scheme), would this protect 50% of the value of the property and would I have to do it at 50% of the market value or could I pay less than the value for 50%? I assume I would then be liable for CGT should I sell it but if I didn't sell the property would this be a feasible idea? The property has a great sentimental value and there is no intention of selling it in the future. Is there other action we could take that would be more appropriate? I'd be grateful for any advice.

Nigel Lord
Posts:518
Joined:Wed Aug 06, 2008 2:18 pm

Postby Nigel Lord » Mon Sep 22, 2003 1:12 am

shhhhh

Your query raises a number of complex issues.

CAPITAL GAINS TAX (CGT)

If your parents either sell or gift all or part of the property to you, they will be deemed to have made a disposal at open market value. This is because you are connected persons. The disposal would be chargeable to CGT subject to the usual reliefs. You do not state whether your parents have ever lived in the property as their main residence. If not, it is likely that there would be an immediate tax charge. This could be deferred by using a Discretionary Trust (see below) and holding over the gain.

You would be treated as acquiring your share of the property at open market value, but would be exposed to tax on any future gain.

If you renovated the property with the intention of selling it for a profit, it is possible that you could be treated as trading as property developers, and the profit would then be liable to income tax rather than CGT. This would be unlikely if you held it as an investment or as a residence for a significant period after the renovation.

If the house will be lived in by you or your parents as a main residence, it is possible that Principal Private Residence (PPR) Relief would be restricted if the Revenue deemed that the expenditure incurred in renovating the property was made with the intention of making a gain.

If the property became the main residence of you or your parents, PPR would only be available to those of you who are resident. It would be possible to extend PPR Relief to the whole property by using a trust (see below) of which a resident was a beneficiary.

INHERITANCE TAX (IHT)

If the property is lived in by your parents, and it is not your intention to live there, any transfer at less than the market value would be ineffective for IHT planning, as it would be treated as a Gift with Reservation Of Benefit (GROB) because your parents would be deriving a benefit by living there. This could be overcome by them paying you a commercial rent for your share of the property, but you would be liable to pay income tax on any rental profits.

If the property is lived in by your parents and you are also resident or became resident, then it would be possible for your parents to transfer a proportion of the property to you at less than market value. This would be treated as a Potentially Exempt Transfer (PET) and it would completely leave your parents' estates if they survived for 7 years. If they died within 7 years, part of the tranfer would leave their estates in accordance with the following table:

0 - 3 years = 0%
3 - 4 years = 20%
4 - 5 years = 40%
5 - 6 years = 60%
6 - 7 years = 80%
7 years + = 100%

DISCRETIONARY TRUST

If your parents transferred part of the property into a discretionary trust with you as a potential beneficiary, it would be possble to hold-over any capital gain indefinitely. This would complement your objectives. There are CGT, IHT and income tax considerations, and you should seek professional advice before implementing this strategy.

My firm specialises in this area of taxation. If you would like us to assist you further we would be delighted to do so.

Nigel Lord
Lord Associates
Taxation & Business Consultants
Caxton House
Old Station Road
Loughton
Essex, IG10 4PE
020 8418 9101 & 07769 931852
mail@lordassociates.co.uk


Return to “Inheritance Tax, IHT, Trusts & Estates, Capital Taxes”