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Where Taxpayers and Advisers Meet

Clarification - gift of family home to reduce IHT

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Joined: Mon Aug 29, 2016 4:29 pm

Clarification - gift of family home to reduce IHT

Postby JMW_tax » Tue Mar 12, 2019 7:16 pm

I hope I am not reiterating another thread - if so, apologies, I did not find it.

My parents have decided to gift their home to my sister and me in equal shares. We live at the property as do my parents.

Our Will advisor has suggested that it is essential that my parents have a legal tenancy and pay a market rental for the remainder of their life, otherwise the gift of the house to my sister and will be seen as tax evasion and upon my parents death will trigger IHT at the date of transfer. Moreover, he states that if in a number of years time (e.g. 10 years) my parents stopped paying the market rental (run out of money), then the IHT situation would revert - as though the gift was done at that point.

I checked the HMRC IHT rules, and believe I read correctly, that where a family home is gifted and the giftors live with the receivers, no rent needs to be paid - which contradicts my Will Advisors advice (I note that he legally advises on WIlls, not tax!).

Your help and clarification please, as we would prefer to mitigate any unexpected large IHT bills (or other such charges).

Thank you

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Re: Clarification - gift of family home to reduce IHT

Postby maths » Tue Mar 12, 2019 11:04 pm

You are basically correct.

A gift of a share in a property by parents to children following which all parties live in the property (ie a co-ownership arrangement) does not give rise to a gift with reservation for IHT on the part of there parents. There is no need form any rents to be paid by parents to children.

However, it is important that parents do not receive any benefit connected with the gift which is why in principle expenses associated with the property are shared 50/50; the children should not, for example, pay all such expenses.

For the above to work the parents must not give away 100% of the property. It is common to gift 50% and possible more but the greater the % gifted the more likely HMRC are to ask questions.

Issues in the future may arise eg children move out which would require changes (eg payment of rents).

Advice essential.

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Re: Clarification - gift of family home to reduce IHT

Postby JMW_tax » Wed Mar 13, 2019 11:38 am

Thank you Maths for the clarification, however.... my parents have already gifted the whole of the property (100%) to my sister and I.
So where does that leave us? I assume fully open to HMRC chasing IHT. In which case what do we do to minimise this liability.
Sorry, I should have probably stated above that the gift had already occurred - I wasn't very clear.

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Re: Clarification - gift of family home to reduce IHT

Postby AnthonyR » Thu Mar 14, 2019 4:03 pm

The key issue is that your parents have made a gift and retained the benefit (a gift with reservation of benefit). HMRCs view is that if you give something away and continue to enjoy a benefit (rent, occupation, use, etc) then you haven't really given it away and they are going to treat it as part of their estate for IHT purposes. This means that in practice where someone gifts 100% of a property they must pay a market rent to avoid any benefit (for the rest of their life or until they cease to live there). For the purposes of this particular test it's also not a question of not benefiting for 7 years, it's not having benefitted in the 7 years prior to death, so market rent must be reviewed annually and any missed rent/underpayment etc could be reservation of benefit meaning the whole asset reverts back into the estate for another 7 years. The rent is obviously taxable income for you.

In practice, where families live together it's usually a far better option to gift a share representing the occupation of the property (ie if you and wife live there with mum and dad it's 50:50, but if you have 3 kids using 3 other bedrooms you can probably argue more, perhaps up to 75:25). This way they've given away the share of the house they don't use and there's no reservation of benefit.

The other thing to bear in mind is that it can impact on your Residence Nil Rate Band for the purposes of IHT (although downsizing relief may apply).

The other complication is that if you move out then CGT could accrue on the property.

If your parents had to go into care, unless you could show that they have sufficient assets to pay for the care other than the home it's possible that the local authority could argue that this was deliberate deprivation as well.

So overall it might not have been the best option to give it all away!

PS your Will advisor said that this was tax evasion - which is a very bad thing and can lead to penalties and in extreme cases jail time. It's not evasion it's just caught by an anti avoidance rule so you still pay IHT. You won't go to jail!
Anthony Rogers CTA TEP
Fusion Partners LLP

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Re: Clarification - gift of family home to reduce IHT

Postby AGoodman » Thu Mar 14, 2019 6:06 pm

For what it is worth, while it remains a reservation of benefit, it should still benefit from the residential nil rate band - a maximum of £350k combined for both parents from April 2020.

I think that works but I'm afraid confirming it would require somebody to take a good look at the legislation.

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Re: Clarification - gift of family home to reduce IHT

Postby maths » Thu Mar 14, 2019 6:19 pm

Do you know the total value of each parent's estate including the property they owned?

What's the value of the property alone they gave to you/sister

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Re: Clarification - gift of family home to reduce IHT

Postby JMW_tax » Sun Mar 17, 2019 10:29 pm

Thank you all for the valued response - and my heart sinks at the hole we may have dug ourselves! Why I did not come to you guys first for advice is quite frankly stupid on my part!

My parents estate is difficult to value, but I will try to give an idea (and the reasons for the difficulties):

1. Rented property owned outright - £230,000
2. Money in bank - Unknown - probably around £100,000 - £150,000 (though could be more - though my mother seems intent on using it up quickly !)

3. The main residence:
There are two parts to the property - originally bought as a whole some 35 years ago. Now consisting of the main house and an Annexe, both of which are very large in size. I have built most of the Annexe and had an agreement with my parents that I could live there for life (having built it). As there are two large houses so close in proximity with grounds that are shared and shared access and garages etc - all dotted around the two houses, it is difficult to see how each property could be sold separately. Likewise, it is difficult to see there being many families that would want two large houses side by side with shared facilities. I think given that I had a life long right to live in the property, the valuation of about £1m would be sensible, but if that devaluation is not reasonable, then it could be £1.5m or more I guess.

Silly question (I could probably find if I was not typing this reply) - what is residential nil band - is this a sum deducted off the the house value for IHT because we live at the property?

CGT is a very interesting twist I had not even thought of - my sister is quite young and so is likely to move out for furthering her career and exploring the world. I assume she would be liable for the CGT on her half. Yikes !

I think the issue of avoiding care home fees is probably a lesser issue - fortunately my parents are both in excellent health and very active and I do not see a significant decline happening for probably a decade or more (fingers crossed).

My real concern is the part about not benefiting for the 7 years before death - that is (hopefully) a very long time that they need to be paying a full rent! To mitigate that, if they moved out of the house into their rented house (say) for a period of 6 months or a year, would that break the chain - because then they would be returning to live with their children like many parents end up doing. Is there any possible ways to limit this problem?

Thank you so much - even though it's news that so far doesn't seem so good !

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