IHT status of primary residence on second death

[patrice]

My parents flat was their main residence and the only property they owned.

My mother passed away in 2006 and gifted her 50% share of the flat, owned as tenants in common with my father, to my brother and myself in equal shares. Therefore subsequent to my mother's death my father continued to own his 50% of the property and my brother and I each became 25% owners, as tenants in common. At the time of my mother's death her 50% share was worth about £187K, which was under the NRB which was £285K at the time. The remainder of her NRB was used up by other gifts, with any excess over the NRB going to my father.

My father continued to live in the flat until 7 months before his death earlier this year. Neither my brother nor myself occupied the property as our main residence at any time. We each have our own homes.

I am trying to establish what the IHT position is on the flat now. Am I correct in thinking that my father's estate will include only his 50% share of the flat and that therefore this is the value that has to be entered on the tax forms? In other words can we ignore the 50% owned by my brother and myself for IHT purposes?

Would appreciate any clarity on this matter. Many thanks in advance!

[patrice]

For completeness of information I should add that my mother's share of the flat was gifted to my brother and myself outright through her Will. There was no Trust called for or established. Furthermore there were no conditions or restrictions placed on either of us as regards disposal or otherwise of our share of the flat.

[pqtaxation]

I am trying to establish what the IHT position is on the flat now. Am I correct in thinking that my father's estate will include only his 50% share of the flat and that therefore this is the value that has to be entered on the tax forms? In other words can we ignore the 50% owned by my brother and myself for IHT purposes?

Yes for IHT: Father owned 50% of house – normally valued at 10-15% discount from 50% share of entire value.

CGT: When you come to sell house, the base cost of each your brother’s and your 50% interests will be half of 50% inherited from mother in 2006 and half of 50% from father.

[patrice]

pqtaxation,

Thanks for your reply.

I assume you mean that my father's 50% share would be valued at 10% to 15% less than 50% of the total value for IHT purposes? If that is so, could you please explain why that applies and how is it presented to HMRC on the IHT forms, because they do ask for the whole value of the asset and also the value of the relevant share (in this case 50%) ?

One further point that occurred to me was that my father did not pay my brother or myself any rent for his use of the flat. Does this compromise the IHT position in any way given all the other factors?

Would appreciate your clarification, thank you.

[pqtaxation]

.. 1) I assume you mean that my father's 50% share would be valued at 10% to 15% less than 50% of the total value for IHT purposes? If that is so, could you please explain why that applies and how is it presented to HMRC on the IHT forms, because they do ask for the whole value of the asset and also the value of the relevant share (in this case 50%) ?

2) One further point that occurred to me was that my father did not pay my brother or myself any rent for his use of the flat. Does this compromise the IHT position in any way given all the other factors?

1) Yes to discount on 50% of entirety value.
That there is such a discount for fractional ownership of a house where the remainder is not owned by a spouse/civil partner is an established practice – see http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM15072.htm

The size of that discount for a 50/50 split in ownership between non-spouses is at least 10% per HMRC practice - see example of 2 sisters in http://www.hmrc.gov.uk/inheritancetax/h ... operty.htm - though HMRC (District Valuer) don’t usually query the use of upto a 15% discount where estimate of entirety value is not aggressively low.

But because the value of the fractional ownership on the IHT account becomes your base cost for CGT when you and your brother dispose of house in future there can be an obvious inter-relationship between any IHT and CGT payable, including where your father’s estate is not IHT payable.

2) In asking about rent payable by your father, presumably you are thinking about gift with reservation of benefit legislation. But it was your mother (by her will) who gifted you her 50% interest and it was not a gift from your father. So that legislation does not apply to your father as he made you no gift before his own death and presumably paid the runnig costs of the flat while he lived there.

[maths]

The Notes to Form IHT 400 indicate it is acceptable to discount the 50% share of jointly held property by 10%. It is the discounted figure which is entered as the value of the 50% share on Form IHT 404.

However, as pqtaxation points out, a 15% discount is often acceptable; suggest this 15% discount is utilised on the 404.

[patrice]

pqtaxation and maths,

My thanks to you both for your replies, which are much appreciated. I will be able to proceed with greater knowledge than before!

Kind Regards to you both.