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Where Taxpayers and Advisers Meet

previously owned asset

rdeen
Posts:2
Joined:Wed Aug 06, 2008 3:15 pm

Postby rdeen » Sat Jan 08, 2005 3:08 am

My father has recently sold his porperty and has given me a sum of money from the sale to use in order to reduce the morgage capital on my own home. He now lives with me at the same address. In these circunstances will we be liable to pay tax on the gift?

Arnold Aaro
Posts:43
Joined:Wed Aug 06, 2008 3:11 pm

Postby Arnold Aaro » Sat Jan 08, 2005 4:33 am

If you gift the funds first to your son, that would potentially be caught if you were to pass away within 7 years.

Although my expertise is not in this particular area, I would have thought it best to put your name on the property to make it your primary residence, then pay off the mortgage directly. No gift is then taking place and you should avoid IHT, as you are paying off a mortgage on your primary residence.

It would be interesting to see how other contributors to the forum view this - perhaps they have some other ideas for you to consider.

Instinctive
Posts:1797
Joined:Wed Aug 06, 2008 3:15 pm

Postby Instinctive » Sat Jan 08, 2005 9:45 am

You do not mention any sums.

The gift from father to son may be a PET and may be chargeable to IHT if he passes away within 7 years, depending on whether his estate, including the gift, exceeds the IHT nil rate band.

Are you perhaps hoping that the gift will be exempt from IHT rules simply because your father has moved in with you ? I don't think so, unless he has received an equivalent value of equity in your property.

RP

rdeen
Posts:2
Joined:Wed Aug 06, 2008 3:15 pm

Postby rdeen » Sun Jan 09, 2005 11:22 am

The toatal ammount of gift in question is 170k. The total estate will not be greater that 200k. i believe this to be below the IHT nil band?

bob.fraser@towrylaw.
Posts:765
Joined:Wed Aug 06, 2008 3:14 pm

Postby bob.fraser@towrylaw. » Sun Jan 09, 2005 2:12 pm

With effect from 6th April 05 your father will be liable to the new Pre-Owned Assets Tax to the extent of his contribution to your home, since he is still deriving a benefit from his gift. The amount of this income tax charge (assuming that he is a basic rate tax payer) is 5% of the £170K = £8,500 taxed at 22% = £1,870. The gift is not a "gift with reservation" as the tracing rules do not follow cash.
However, if he were to pay a market rent for the part of the home he occuppies, then the POAT will not apply as he is no longer deriving a benefit.
Bob

Huw Williams
Posts:285
Joined:Wed Aug 06, 2008 2:18 pm

Postby Huw Williams » Mon Jan 10, 2005 1:02 am

Bob

Isn't there an option within the pre-owned assets tax regime to elect to be taxed on a "gift with reservation of benefit" instead of the income tax?

Because the value of the estate is within the IHT nil-rate band this would then mean no IHT instead of an actual income tax charge.


Huw Williams
Nottingham

Instinctive
Posts:1797
Joined:Wed Aug 06, 2008 3:15 pm

Postby Instinctive » Mon Jan 10, 2005 6:58 am

The money from the sale of the property has not been used to buy the son's property in which the father is now living. The son's property was already previously bought by the son. The father's gift has merely helped to reduce the son's existing mortgage.

I am not so sure if this is caught by the new legislation.

RP

bob.fraser@towrylaw.
Posts:765
Joined:Wed Aug 06, 2008 3:14 pm

Postby bob.fraser@towrylaw. » Tue Jan 11, 2005 12:54 am

Huw,
Yes, he could elect to be treated as GROB, and yes there should be no IHT implications if the estate is within nil rate band. I should have noted that!
Bob

Huw Williams
Posts:285
Joined:Wed Aug 06, 2008 2:18 pm

Postby Huw Williams » Tue Jan 11, 2005 1:06 am

Instinctive:

This is one of the problems with the new tax rules; they could apply in all sorts of situations and the rules have not yet been tested by the courts.

I agree there is a question of interpretation as to whether helping pay off a mortgage is "contributing to the purchase" of the property. Stricly speaking the property has already been bought but practically speaking it is a major contribution.

A similar issue will arise where the cash was donated many years ago and is now part of the overall capital of the son or daughter buying a new property - do you trace the cash through into the new property? There is nothing in the legislation to answer the question.


Huw Williams
Nottingham

Instinctive
Posts:1797
Joined:Wed Aug 06, 2008 3:15 pm

Postby Instinctive » Tue Jan 11, 2005 10:34 am

Huw,
Thank you for your response. I suppose that it is more likely to get caught if the property has been bought after the gift of money, or relatively shortly prior to the gift of money.
RP


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