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Where Taxpayers and Advisers Meet

Inheritance Tax and with/without reservation of benefit

Dotty89
Posts: 1
Joined: Thu May 23, 2019 7:34 am

Inheritance Tax and with/without reservation of benefit

Postby Dotty89 » Thu May 23, 2019 7:57 am

My parents, sister and I have always lived together and are currently moving house. My parents own the house, with no mortgage. My parents are gifting the entire sale value of the house (£500,000) to my sister and myself. My sister and I are then using that money (and a mortgage £196,000) to buy a new house for the 4 of us to live in. The house deeds will then be in my sisters and my name, but with our parents still living with us (they will not pay rent). My sister and I will then be responsible for all the maintenance and utility costs in relation to the house. In addition, my parents are gifting my sister and I £20,000 each, which my sister and I plan to use to pay stamp duty, solicitors etc. Based on my solicitors advice we have asked my parents to sign paperwork to say that they have no interest in the house (.i.e. my sister and I can throw them out if we ever wanted). I was just wondering, under these circumstances, if anyone could tell me whether you think the house value gift (£500,000) will be considered a gift without reservation. I'm not convinced that this is the case. Having tried to look into the matter myself I am aware that gifts given over 7 years before death can be exempt from IHT, and that the £500,000 is under the current inheritance tax threshold for my parents. But as we are using the money to buy a house, if the house value goes up before death, does the value of the £500,000 gift go up to (perhaps above the IHT threshold)? Is there anything else I can do now to make the £500,000 potentially exempt from IHT?

Jholm
Posts: 57
Joined: Mon Mar 11, 2019 4:22 pm

Re: Inheritance Tax and with/without reservation of benefit

Postby Jholm » Thu May 23, 2019 9:46 am

Since they are giving cash and not the house itself, it would not be a gift with reservation of benefit. However, they could be liable to a pre-owned asset charge and be subject to income tax on 'notional income'. This will be the case if they do not pay rent at full market value.

See here for info:

https://www.taxationweb.co.uk/tax-articles/general/pre-owned-assets-tax-a-practical-update.html

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm44000

AnthonyR
Posts: 268
Joined: Wed Feb 08, 2017 2:33 pm

Re: Inheritance Tax and with/without reservation of benefit

Postby AnthonyR » Thu May 23, 2019 9:15 pm

Since they are giving cash and not the house itself, it would not be a gift with reservation of benefit. However, they could be liable to a pre-owned asset charge and be subject to income tax on 'notional income'. This will be the case if they do not pay rent at full market value.

See here for info:

https://www.taxationweb.co.uk/tax-articles/general/pre-owned-assets-tax-a-practical-update.html

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm44000
Or they can opt to treat it as a gift with reservation of benefit.

Unless the family have significant other assets there's unlikely to be a big IHT saving in any case as the property would be covered by nil rate band x2 and residence nil rate band x2 giving you £950,000 of allowances now and £1m from April next year.

On top of that if you or your sister move out you expose it to CGT and if either of you divorce it will be part of the marital assets and potentially result in a share passing to a spouse.

Unfortunately a lot of solicitors who deal mainly with conveyancing don't really understand the issues around the transfer of a family home and create issues for clients on a regular basis (I've advised 3 different clients on this issue this month!).
Anthony Rogers LLB CTA TEP
Fusion Partners LLP
anthony@fusionpartners.co.uk


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