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Where Taxpayers and Advisers Meet

gifting parental house to avoid inheritance tax

Joined:Wed Aug 06, 2008 3:15 pm

Postby pam1 » Thu Jan 06, 2005 3:15 pm

My Father is currently considering gifting our family home to his four children. He is 58 years old and wanted to gift the house to us to avoid future inheritance tax or selling the property to pay for residential care. The house is worth approximately £350,000 and the mortgage has been paid off. Therefore our question is what is the best way for him to gift the house to the four of us and not incur any (or minimal) tax.

secondly once he has gifted the house to us, on the event of its sale what would be the best way for the four of us to minimise the capital gain on it. Is this the best way to go about it??

Many thanks

Joined:Wed Aug 06, 2008 3:13 pm

Postby cranleys » Thu Jan 06, 2005 3:43 pm


You would be better placed putting this in a Discretionary trust. Rules apply where your father will need to pay tax on the value of this rent.

Second option is for him to obtain a mortgage and I can put you in contact with someone who can assist.

I am writing a book on IHT and would like to assist you perhaps using you as an example.

Colin@cranleys Always available for you.

Joined:Wed Aug 06, 2008 3:08 pm

Postby johnfkavanagh » Thu Jan 06, 2005 4:44 pm

Dear Pam

You refer to the property as "our family home". Do any of the children still live in it? Is your father married, widowed, divorced?

You should be aware of the fact that, generally, any gift will be ineffective for IHT purposes while he remains in the property because it will be a gift with reservation fo benefit (GROB). If the gift does not succeed in saving any IHT, it is entirely possible that the local authority will succeed in arguing that the sole or main purpose of the transfer was to avoid liability to contribute towards the cost of residential care, in which case the transfer could be voidable at their instance. I am not an expert on residential care matters - I know that there are others on this forum who are.

You mention minimising the capital gains tax exposure but it is entirely possible that the CGT position will be made worse by what you propose.

It seems to me that, on the face of it, a transfer into a discretionary trust will give rise to an immediate IHT liability of about £20K and therefore, I have to disagree with Colin's suggestion.

In short, I suggest that you need paid for pofessional advice on the issues raised.

John Kavanagh
UK Tax Consulting Limited
John Kavanagh CTA ATT FRSA
Director, UK Tax Consulting Limited

Arnold Aaro
Joined:Wed Aug 06, 2008 3:11 pm

Postby Arnold Aaro » Thu Jan 06, 2005 11:28 pm

[ this reply has been removed as "blatant advertising" ]

Huw Williams
Joined:Wed Aug 06, 2008 2:18 pm

Postby Huw Williams » Thu Jan 06, 2005 11:33 pm

I would have to agree with John that gifting the property to reduce IHT is difficult because of the gift with reservation of benefit (GROB) rules and would suggest looking at whether there are any other assets he would want to pass on first.

The idea of remortgaging does work - if your father were to borrow money and give you the proceeds, he would be worth less immediately and so the potential IHT bill is reduced. However he would need to be able to afford the mortgage repayments, which may make the idea unworkable.

This is why equity release schemes were developed - instead of repaying the mortgage as you go along, it is all collected out of the sale of the property (or other assets) after death. But be warned that the interest on the mortgage would be significant and could mean that although only (say) £100,000 is borrowed, there is (say) £200,000 to be repaid after death.

But if you were to talk to a professional about the family circumstances in more detail, there may be a much better option available to you.

Huw Williams

0115 914 6846

Joined:Wed Aug 06, 2008 3:14 pm

Postby bob.fraser@towrylaw. » Fri Jan 07, 2005 2:01 am

You do not mention a mother, so I presume that your father owns the house exclusively.
You also do not say whether you or any of the other children live in the house – this has a bearing on potential solutions.

The problem that your father faces – as John and Huw have said – is that there is a difficulty if your father gifts the house yet still remains in residence. This is the gift with reservation that John mentioned. These "gifts with reservation" are ignored by the Inland Revenue for inheritance tax purposes, so IHT would still be payable on the value of the home on your father’s death. Furthermore if, having the home to the children, it was then sold there would be capital gains tax (CGT) payable on any gain from the date of transfer.

In addition to the above, the government introduced the Pre-Owned Assets Tax in the Finance Act 2004, which will become effective in April 2005. Under this tax, even if your father were to find some way of avoiding the "gift with reservation" rules, he would be caught by the POAT. This is chargeable at 5% of the value of the house, taxed at your father’s marginal rate of tax. Assuming that he is a 22% tax payer, the POAT liability would be £3,850pa.

Turning to the issue of avoiding paying for residential care costs, you need to be aware that:
1. The local authority have very wide ranging powers to recover assets if they believe that an individual has deliberately divested themselves of property to avoid care home fees. This is often done as a clawback through the benefits system or by simply refusing to fund a care home place. The family would then have to fund the place if your father did not have sufficient savings and income of his own. The local authority also have the power to place a charge over the property which would have to be discharged on your father's death either from the sale proceeds from the house or elsewhere from his estate. His executors would have a legal obligation to discharge this debt as a priority.

2. A common justification to the local authority for gifting the home is to avoid inheritance tax (IHT), but this justification would not seem to be likely in this case since the gift would fall foul of the GROB rules.

As to the possible solutions, I agree with John that the discretionary trust is not advisable. Any transfer into a discretionary trust over the IHT nil rate band limit of (currently) £263,000 will be treated as a lifetime transfer and liable to an immediate tax charge of 20%.

Bearing in mind that the first £263,000 of an estate is not liable to inheritance tax, the amount of IHT that would actually be payable is (currently) £34,800. You need to make sure that any solution you adopt will not cost more than this.

Without knowing more details of your fatherÂ’s financial circumstances and health, this is about as far as I can go in giving useful advice. Bear in mind that if your father is in good health, then his statistical life expectancy is 21 years. This is relevant when you start to think of mortgages and equity release schemes, since this is potentially the period over which the interest will be payable.

As stated by John and Huw, your father needs professional independent financial advice on this. Please contact me if I can help further.

Bob Fraser MA, MBA, FSFA
Associate Director, Rensburg Investment Management
office: 02890321002

Joined:Wed Aug 06, 2008 3:10 pm

Postby robertmlaws » Fri Jan 07, 2005 5:21 am

1) Your father might prefer to spend his own money on private care when/if the time comes rather than have to accept whatever the state offers at that time.

2) If the children don't live in the house but father does you could find there is still an IHT bill based on the value at death (becuase it was a gift with reservation) plus a CGT bill based on the increase in value since the time of the transfer as it's not your PPR. You could get in a position where you pay tax twice!

If it were me I would leave things as they are, but I dare say there are fancy trust schemes people can draw up.

not a lawyer

Joined:Wed Aug 06, 2008 3:15 pm

Postby Instinctive » Fri Jan 07, 2005 9:34 am

Perhaps your father can downsize, ie sale property and buy a smaller one to live in. Any money left over could be given to you all in cash or used to buy an investment property in all your joint names. This would produce income and also, hopefully, capital appreciation over the longer term.


mrs Peel
Joined:Wed Aug 06, 2008 3:37 pm

Postby mrs Peel » Thu May 11, 2006 9:04 am

Hi, I have a question which I'm researching for my best friend (honest !!)
Her Mother in law proposes to sell the 5 bedroom family home for 200 K (or less) to one of 5 children who currently lives with her. The property is certainly worth more (maybe 300k +), but the daughter can only get a mortgage for 160K. The Mother intends to remain resident in the property with her daughter until her death without paying rent, so effectively there will be no change in their circumstances.

I appreciate this kind of fiddle doesn't fool the inheritance tax people, especially if the mother dies within 7 years, but I would like to understand the capital gains tax the daughter would be liable to pay if she chose to sell the property and know whether it is legal to dispose of an expensive property to a child for significantly less than its market value.

Also my friend's husband is effectively being disinherited by this mother, who has already given another property away to another sibling.
Does he have any rights to contest his mother disposing of her assets without sharing them equally between her 5 children ? he has always done his duty by her and I believe she has no justifyable reason for favouring her poorer children, yet she has systematically given money and property to his sisters and nothing to my friend's husband or their children.

Please help ??

Joined:Wed Aug 06, 2008 4:00 pm

Postby AAA » Wed Oct 24, 2007 8:21 am

Hi, I have a question which is a slight variation on what has been posted already but could be significant in the grand scheme of things.

My father's house is worth in excess of £500k. My brother & sister live there and my father is divorced. He is not in the best of health so may not have the 'seven years' to 'gift' the house to us to exempt the gift.

We would like to keep the house in the family but don't know how to do this. We would not be able to afford the IHT bill and would have to sell the house to pay this.

Is he able to sell the house to his children at below market rate?

Also, my father predominantly lives abroad, therefore can he 'gift' the house to his children as he does not live there. I don't know whether discretionary trusts are an option and whether they need to be in force for a certain period of time?

Not sure of the options really and grateful for your help.

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