Tax free gifts

[mjh1]

Hello,
could someone please advise on the following scenario?
My parents recently sold their house and moved into my house (I moved in with my partner). They now have all the proceeds in the bank, and are very happy in my house and do not want to move out. One proposal was to split their estate (approx 150k) between the 2 children, to give them each a large deposit for a house.
Are there any implications of accepting this 75k, and leaving them in my house (which is fully paid for), or is there a better way of going about this?
The bottom line is that my parents want to retain very little of their assets, and help my brother and I as much as possible in the current housing market.

[Arnold Aaro]

If they gift you cash, provided they survive 7 years, and do not benefit from the gift they have made to you, there will be no Inheritance Tax. This assumes of course their allowance of £263k has already been used up through their other assets. [If their net estate is less than the £263k then ther is no IHT anyway.]

One way of gifting cash, (which although not necessarily appropriate in this case) that you/they may like to consider is through a Discounted Gift Trust.

This would allow your parents to gift some of their cash away to you and your brother through a Trust (normally in an Investment Bond). You would not be allowed to touch the gift until the inevitable happened to both your parents, but they would be allowed to take a tax free income FOR LIFE, from the gift they have made to you.

The result is that on starting the trust and making the gift, a considerable portion (e.g. 50% for a healthy 70yr couple) of the amount put into it would be immediately classed as outside the estate for Inheritance Tax purposes.

After 7 years the whole amount is then outside the estate, and you have then avoided Inheritance Tax on complete gift. But of course your parents are still receiving the tax free income for life which they can use towards living expenses, or perhaps to pay rent to you.

As you can see with a Discounted Gift Trust your parents are removing capital from the value of their estate, thus reducing IHT, but still receiving a tax free income to live off/pay rent.

Arnold Aaron
Investment and Inheritance Tax Planner
Zurich Advice Network
e mail: arnold.aaron@zurichadvice.co.uk
Tel: (office) 0208 437 2500 (m) 07957 440 724

[I advise on Inheritance Tax Planning, and specialise in Discounted Gift Trusts and Investments in general]

[Instinctive]

There has been a lot of correspondence in this forum over the last 2 months regarding the new Pre Owned Assets Tax from 6 April 2005. Basically, your parents are giving all their assets to you and in return living free in your house. Unless they make the gift of £150,000 ineffective for IHT, they may be charged POA tax at 5% of the value of the house.

I guess that the local authority may also have an issue with what has happened if your parents wish to claim residential care home fees.

The bigger problem will be for you when you come to sell the house in the future, because the house has ceased to be your only or main residence, and therefore, you may become liable to pay CGT on some of the gains.

I would have thought that the better way of going about would be for your father to buy your house from you, if necessary by a private mortgage arrangement with you. You will exempt from CGT on sale if this house has always been your only or main residence. Your parents will be exempt from CGT as their only or main residence if they decide to sell in the future. If they were to die, their estate is well within the IHT Nil rate band and therefore there are no IHT implications either.

Alternatively, depending on all the circumstance, you may wish to sell part of your house to them, ie join them in the title deeds, for £150,000. Provided you use the house for occasional residence, you may be able to nominate this as your MAIN residence for CGT purposes. I assume that you do not have any other property used as your only or main residence.

Ramnik
ramnikrp@hotmail.com

[bob.fraser@towrylaw.]

Just to round off Ramnik's summary of your options, your father could pay you a commercial rent for living in your house. This would avoid the pre-owned assets tax trap. The £75,000 gift would then become a potentially exempt transfer for IHT, though from what you say there doesn't seem to be a liability to IHT anyway.

[mjh1]

Many thanks for the prompt replies chaps.
I don't intend to ever sell my house, as I plan to rent it out, in order to top up my pension in 20 or so years time, so I assume that eliminates me from the CGT? (sounds morbid, but i don't expect my parents to be here by then, but I hope they are!)
Is it thefore the case that the Discounted Gift Trust is the way to go?

Thanks

Martin.

[Instinctive]

If your father pays you rent as suggested by Bob, you will be charged income tax on this. You say that you will never sell the property. But as they say, never say never. Who knows what could force your hands in the future.

My biggest concern is your CGT exemption and I don't see any reason why your parents can't be joined in the property with you or the property sold outright to them. They can leave the property to you in their will. This way you will inherit the property at open market value and all the gains are washed away. You could then let the property if you wished.

ramnik
ramnikrp@hotmail.com

[mjh1]

I suppose that my main concern is that if I were to sell my house to my parents, then should any of them be taken into care, my house would be sold to fund that.
I would rather keep the house in my name, as a future source of income (I'm not charging them any rent at the moment, as a thankyou for putting me through higher education etc etc).

Martin

[taxpayer]

Hi

My question could well have had the same title so I hope it's acceptable to add it to this thread.

The question was :
If I give my daughter a large gift (of £20,000 for example) and then survive for more than seven years, would either of us have any tax of any sort to pay?

Thanks,
John

[Instinctive]

First to mjh1:
Perhaps you should check whether the local authority have powers not to fund care home fees where persons such as your parents have sold their homes and gifted away the money. If they have the powers to do this, then your objective is not served and moreover you would have lost the valuable CGT uplift at death.

Now to John (taxpayer):
There are no CGT implications for anyone in connection with a cash gift.

If you survive the gift by 7 years, then there are no IHT implications for either party.

If you do not survive the gift by 7 years, the gift only has any potential IHT implications if your estate, including gifts within 7 years of death, exceeds the NIL rate band which is presently £263,000.

Ramnik
ramnikrp@hotmail.com

[taxpayer]

Thanks Ramnik

John