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Where Taxpayers and Advisers Meet

Purchase of parent's house as part of IHT

MickB
Posts:5
Joined:Wed Aug 06, 2008 3:25 pm

Postby MickB » Fri May 20, 2005 8:32 am

Hi,

I'm afraid this is a slightly tangled question, but it's one that I've so far been unable to find an answer to. Any help will be gratefully received.

When my father died, the family home passed to my mother who continued to live in it. The house was valued at the time (1999) at around £240,000.

In 2003 I moved in with my mother, along with my wife and children, with the intention of renovating the house so she could get a decent price for it if she subsequently decided to sell.

We can now see an end to the renovation and the house has now been valued at £800,000.

My mother would also like to be in a position to make a gift to myself and my 3 siblings at some point, from the proceeds of the property.

My question is whether I would now be able to do the following:

1. With the consent of my 3 siblings, purchase the house for £300,000.

2. Agree with my siblings that the actual value of the house is £800,000.

3. My mother would make a gift of £100,000 to each of my siblings. This is where it gets complicated because I was wondering if she would be able to purchase a share of their houses? eg, she would pay £100,000 for a very small share of the house, say 1% of the total value.

4. I would agree to pay my siblings a further £100,000 each at some point in the future.

So, apologies for the complex nature of this question, and I hope I've explained it adequately! The nub of it is whether we can minimise the potential IHT burden, without shifting it elsewhere.

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

Postby Arnold Aaro » Fri May 20, 2005 9:47 am

Not to worry Mick - We are here to straighten things for you!

You and you siblings can purchase any share of the home from your mother. However, on any share of the Property which now belongs to you after the purchase, your mother needs to pay a market rate of rent to you, otherwise another tax charge could be triggered. She could then be left to posess up to the nil rate band (£275k this tax year) of the property, which would avoid IHT.

To do this effectively however, your mother can invest the proceeds of sale in a Discounted Gift Trust. This will remove the capital from her estate. This will also giver her an income (tax free in certain cases) which she could use to pay rent on the portion of the property that belongs to you.

The Discounted Gift Trust would allow your mother to gift away the cash to you and your sblings through a Trust. You would not be allowed to touch the gift until the inevitable happened to your mother, but your mother would be allowed to take a tax free income FOR LIFE, from the gift she has 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 old female) 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 mother is still receiving the income for life which she can use to pay rent to you.


Be aware though that any value of the property she 'gifts to you' will be counted as a PET gift, which means she will need to live 7 years before it is removed form her estate, in addition to the requirement to pay rent to you.

If I can be of further help, please don't hesitate to contact me.

Arnold Aaron
Investment and Inheritance Tax Planner
Zurich Advice Network
Contact no: 07957 440 724
e mail: arnold.aaron@zurichadvice.co.uk

MickB
Posts:5
Joined:Wed Aug 06, 2008 3:25 pm

Postby MickB » Fri May 20, 2005 12:15 pm

Thanks a lot for this Arnold.

I think I understand what you're suggesting and it seems like a good idea. To make sure I've got it straight though, are you saying that I would be able to buy the house outright for £300000 even though the current value is nearer 800000? Or are you saying that the missing £500000 would be classed as a PET gift? (This is assuming that someone, somewhere identifies what has been done of course. The house has not been on the market for 30 years.) I would be looking to purchase the house outright if possible.

Also, is my proposal of my mother purchasing a share of my siblings' properties a legitate way of transfering what is effectively a gift, or is there a capital gains implication? I was thinking that if it is shown that the stake she paid equates to a defined share of the property, then the £100000 invested would actually be worth, say, 1% of the property (eg £2000 on a £200000 house). I don't know if it is possible to do this of course - it was just an untrained idea of mine.

I must admit I'm finding it difficult comtemplating all the above but as you pointed out, it is an eventuality that is inevitable and it seems best to prepare for it.

Thanks again for your response.

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

Postby Arnold Aaro » Sun May 22, 2005 3:38 am

Correct - any shortfall on the market open market value will be clased as a 7 year PET. Don't forget that rent must be paid on this portion, otherwise this portion of the property will still be considered as part of her estate.

QUOTE: "Also, is my proposal of my mother purchasing a share of my siblings' properties a legitate way of transfering what is effectively a gift, or is there a capital gains implication?"

This move will achieve nothing. You are simply swapping cash for the property. i.e. The value of the estate is still the same, and therefore no IHT savings are made, and are infact incurring stamp duty too, and CGT (if they are investment properties). The Discounted Gift Trust is one to strongly consider, as it can be a good way of removing capital from an estate, as outlined above.

Do come back again if I can be of more help.

regards,

Arnold.
--------------------------------------
Arnold Aaron
Investment and Inheritance Tax Planner
Zurich Advice Network
Contact no: 07957 440 724
e mail: arnold.aaron@zurichadvice.co.uk

[Advising on investments and Inheritance Tax planning, and specialising in setting up Discounted Gift Trusts]

Anthony Nixon
Posts:260
Joined:Wed Aug 06, 2008 2:18 pm

Postby Anthony Nixon » Mon May 23, 2005 1:12 am

Can I suggest a diffent way of going about things which may be simpler?

Suppose your mother gives you half the house. This is a PET, but there is no reservation of benefit and no need for your mother to pay a rent because a gift by a parent to a child sharing the house is specifically not a GROB and not subject to the POAT legisilation.

These exemptions rely on your mother continuing to own her half share of the house.

Instead of paying £300,000 to your mother therefore why not give this to your three siblings? At this point you have each received, effectively, £100,000.

With half the house, worth £400,000 remaining in your mother's estate the potential IHT liability remaining is 40% of £125,000 or £50,000 - £12,500 for each of you and your siblings. You can each decide individually whether you want to insure your mother's life for your share of this.

You may also want to look at the cost of insuring your mother's life for just the next seven years to guard agains tax on the PET if it fails.

A more aggressive version of this plan is for your mother's gift to you to be of 75% of the value of the house. There is nothing in the legislative let outs which limits your mother's gift to 50% although the Revenue do look harder at gifts of more than half.

Anthony Nixon
Partner
Lester Aldridge Solicitors
Alleyn House
Carlton Crescent
Southampton
SO15 2EU

Tel: 023 8082 0442
Mob: 07881 920742
Fax: 023 8082 0441
Email: anthony.nixon@la-law.com
Website:www.lester-aldridge.com

MickB
Posts:5
Joined:Wed Aug 06, 2008 3:25 pm

Postby MickB » Mon May 23, 2005 1:34 am

Thanks to both Anthony and Arnold for this advice. I'm going to have a chat with the family about the options you've outlined to see which way they want to go.

Can I just ask for a bit of clarification about your suggestion, Anthony? If my mother made a gift of 75% of the property and saw out the 7 years, I'm assuming there would be no IHT? If she unfortunately didn't see out the 7 years then would the usual tapering apply?

On the 300000 gift from me to my siblings; would this be liable to any tax? I read somewhere that a gift from a parent of more than £3000 in a year are liable to a tax equivalent to a Bank's interest rate.

Also, I would actually owe my siblings 25% each of the actual value of the house and so would need to pay them another chunk each when the house is sold in the future. I guess the same rules would apply to this 'gift' at that time?

Thanks again for your advice - this is really helping me to understand our options.

Mike

Anthony Nixon
Posts:260
Joined:Wed Aug 06, 2008 2:18 pm

Postby Anthony Nixon » Mon May 23, 2005 2:02 am

Yes you are right Mike. If you go down the route of Mother giving you 75% it drops out of IHT altogether after 7 years and tax begins to taper after just 3. Insuring your mother's life for these limited periods is worth considering.

Yes your gift of £300,000 to your siblings is also a PET. Well worth insuring against your death within 7 years I suggest.

The arrangement I have put in place for another client is for you to declare a trust of the 75% given to you by your mother, immediately after you receive the gift, ensuring that your siblings get the appropriate share after your mother's death. Obviously this needs tailoring to your precise circumstances.

Anthony

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

Postby Arnold Aaro » Mon May 23, 2005 2:37 pm

Mick - a sales pitch if I may!

I offer one of the most competitive life assurance policies on the market for IHT planning, as Anthony has suggested.

If you would like a quote, under no obligation, feel free to provide me details of your mothers date of birth, whether she is a smoker or non smoker,(via personal e mail or this forum at your discretion) and I can give you a quote.

regards,

Arnold.
--------------------------------------
Arnold Aaron
Investment and Inheritance Tax Planner
Zurich Advice Network
Contact no: 07957 440 724
e mail: arnold.aaron@zurichadvice.co.uk

MickB
Posts:5
Joined:Wed Aug 06, 2008 3:25 pm

Postby MickB » Mon May 23, 2005 11:59 pm

Hi,

Thanks again Anthony and Arnold - your advice is much appreciated. I need to research these options a litttle more now and then discuss them with my family before going any further.

Arnold, I'll be interested to see how much this sort of life assurance costs, so I'll send you the details to your email address.

Thanks,

Mike

tonygough
Posts:2
Joined:Wed Aug 06, 2008 3:25 pm

Postby tonygough » Mon May 30, 2005 11:00 am

Might I add something for you to think about?

As you moved in with Mother and spent a good deal of time and money renovating the property; have you invested any of your own money into the renovation as this would have a benefit when looking at the whole tax situation?

Also whilst you may not have wished to charge your mother for your services any funds used to “pay you” for the renovation work could be deducted from the PET part of the valuation.
It would appear that your siblings are going to benefit from your good work and that their share of the estate has been enhanced.

Tony Gough
Principal
New Forest Financial Management // The Mortgage Wizard.co.uk
1 Velvet Lawn Road
New Milton
Hampshire
BH25 5GE

01425 629894 www.ukfinancial.co.uk


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