Inheritance Tax Question

[courchevel]

Hello

I have been investigating with my father ways of mitigating the
inheritance tax bill should he and my mother die.

Their largest asset is their house and ideally we would like to be
able to pass it on to me while they continue to live in it. This
clearly isn't very easy with the current rules. However we have come
up with an idea but I need to find out if it is possible.

Would this be allowed:

I raise a mortgage and purchase my parents house from them at the full
market value
I allow them to continue to live in 'my' house.
At some point in the future (6 months, a year??), my parents gift to
me a large sum of money (that they happened to have received for
selling their house).
I can do what I want with the money, but might decided to pay off the
large mortgage that I have
I now own my parents house, they continue to live there rent free and
assuming they live 7 years there is no IHT liability.

Thanks

Mat

 

[Alan Ferris]

Hello

I have been investigating with my father ways of mitigating the
inheritance tax bill should he and my mother die.

Their largest asset is their house and ideally we would like to be
able to pass it on to me while they continue to live in it. This
clearly isn't very easy with the current rules. However we have come
up with an idea but I need to find out if it is possible.

Would this be allowed:

I raise a mortgage and purchase my parents house from them at the full
market value
I allow them to continue to live in 'my' house.
At some point in the future (6 months, a year??), my parents gift to
me a large sum of money (that they happened to have received for
selling their house).
I can do what I want with the money, but might decided to pay off the
large mortgage that I have
I now own my parents house, they continue to live there rent free and
assuming they live 7 years there is no IHT liability.

But CGT when you sell it. Have you worked out how much this will
actually save you?

--
Alan "Ferrit" Ferris

()'.'.'()
( (T) )
( ) . ( )
(")_(")

 

[Stickems.]

It might work out if there is no limit on the amount of money a parent can
give to their child in any tax year. BUT, your parents must pay you a rent
at the market rate whilst they are living in your house. Before you do this
1) wait until the next general election, IHT may be in line to be abolished.
2) Obtain from HMRC confirmation that your proposed course of action will
remove the house from your parents estate for IHT purposes.

| Hello
|
| I have been investigating with my father ways of mitigating the
| inheritance tax bill should he and my mother die.
|
| Their largest asset is their house and ideally we would like to be
| able to pass it on to me while they continue to live in it. This
| clearly isn't very easy with the current rules. However we have come
| up with an idea but I need to find out if it is possible.
|
| Would this be allowed:
|
| I raise a mortgage and purchase my parents house from them at the full
| market value
| I allow them to continue to live in 'my' house.
| At some point in the future (6 months, a year??), my parents gift to
| me a large sum of money (that they happened to have received for
| selling their house).
| I can do what I want with the money, but might decided to pay off the
| large mortgage that I have
| I now own my parents house, they continue to live there rent free and
| assuming they live 7 years there is no IHT liability.
|
| Thanks
|
| Mat
|

 

[Ronald Raygun]

It might work out if there is no limit on the amount of money a parent can
give to their child in any tax year.

There is no such limit, though there is a limit for gifts which will *not*
later be counted as part of the donor's estate for IHT purposes should they
die within 7 years.

BUT, your parents must pay you a rent
at the market rate whilst they are living in your house.

That only applies if they gift the house, but under the OP's plan,
they are selling it to him. Then they can gift him the money no
questions asked. It is then up to him whether he lets them stay there
rent free.

If you prefer, you could deem half the money to be rent up front for
the full 7 years, and the other half to be an ordinary gift.

 

[courchevel]

But CGT when you sell it. Have you worked out how much this will
actually save you?

CGT on what ? Or are you assuming that the value of the house rises
after I have bought it creating a CGT liability on the difference
between the purchase price and the eventual sale price?

These are the figures that I have worked out:

The house is worth about £1.3m, Assuming I have a mortgage for the
full amount for a year (after which I will be able to pay it off as I
would have got the cash back from my father). The interest repayments
would be £91,000, stamp duty £52,000 and other purchase costs
(solicitor etc) of say £7,000 taking the total costs to £150,000.

My parents have other assets (shares) that would use up the nil-rate
band on their death so I would have to pay IHT on the full value of
the property at 40%: £520,000

So doing the purchase in this way saves the difference £520,000 -
£150,000 = £370,000

I would have to pay CGT if I sold the house in the future for more
than £1.3m but equally if my parents still owned it on their death the
IHT liabilty would increase by the same amount.

Are my figures correct or have I missed something? What else should I
take into account?

 

[courchevel]

Stickems. wrote:

If you prefer, you could deem half the money to be rent up front for
the full 7 years, and the other half to be an ordinary gift.

I don't fully understand - as you said - I can let them stay there
rent free because they have not gifted me the house, I have bought
it. Why would I want them to pay me rent rather than giving me an
ordinary gift - or half/half? If some of the money is deemed to be
rent, wouldn't I have to pay tax on it as rental income?

 

[Alan Ferris]

I don't fully understand - as you said - I can let them stay there
rent free because they have not gifted me the house, I have bought
it. Why would I want them to pay me rent rather than giving me an
ordinary gift - or half/half? If some of the money is deemed to be
rent, wouldn't I have to pay tax on it as rental income?

One could argue that if you let them live there rent free, then they
give you a gift, that part of the gift was in fact rent....HMRC may
seek to see it that way.

--
Alan "Ferrit" Ferris

()'.'.'()
( (T) )
( ) . ( )
(")_(")

 

[Ronald Raygun]

I don't fully understand - as you said - I can let them stay there
rent free because they have not gifted me the house, I have bought
it. Why would I want them to pay me rent rather than giving me an
ordinary gift - or half/half?

The problem is that (and I don't know if HMRC have the right to do this)
one can see through your ploy and deem it to be a mechanism for hiding
that what's really going on is the gifting of the house, in which case
allowing them to live there rent free would invalidate the PE part of
what would have been a PET since, unless they'd be paying you rent the
gift would come with reservation of the right to live there.

If some of the money is deemed to be
rent, wouldn't I have to pay tax on it as rental income?

I'm afraid so, but the loan interest can be deducted from the rent.

 

[John Boyle]

Hello

I have been investigating with my father ways of mitigating the
inheritance tax bill should he and my mother die.

Their largest asset is their house and ideally we would like to be
able to pass it on to me while they continue to live in it. This
clearly isn't very easy with the current rules. However we have come
up with an idea but I need to find out if it is possible.

Would this be allowed:

I raise a mortgage and purchase my parents house from them at the full
market value
I allow them to continue to live in 'my' house.
At some point in the future (6 months, a year??), my parents gift to
me a large sum of money (that they happened to have received for
selling their house).
I can do what I want with the money, but might decided to pay off the
large mortgage that I have
I now own my parents house, they continue to live there rent free and
assuming they live 7 years there is no IHT liability.

Some thoughts,,,,

The CTO decide to 'look through' the transaction and trigger Pre Owned
Asset Tax.

Your wife runs away with me and sues you for divorce. She claims half
you parents house and half the 'gift' and wins.

You lose mental capacity and the court of protection appoints a receiver
and claims all the dosh to pay for your care for the rest of your life.

You go bankrupt and the trustee claims the lot.

You die before they do and your huge IHT bill means you mum and dad get
chucked out of the house to pay your iht bill.

You have blazing row with your mum. She wants a smaller house and you
wont sell, because it is quite obvious that all of this exercise is just
so you cant get the house you want, and not for the good for your mum
and dad.

Your mum and/or dad need to buy Long term Care, or want to move to a
smaller house. You have to sell the house and trigger a huge CGT bill
you werent expecting.

You wont sell the house, and they end up in a smelly council home.

 

[John Boyle]

One could argue that if you let them live there rent free, then they
give you a gift, that part of the gift was in fact rent....HMRC may
seek to see it that way.

Yes, POAT is my worry here.

 

[John Boyle]

My parents have other assets (shares) that would use up the nil-rate
band on their death so I would have to pay IHT on the full value of
the property at 40%: £520,000

So, they have financial assets in excess of £600k? Subject to their own
CGT situation these could be passed to a Discounted Gift Trust, in fact
depending on their age, quite a lot more could be put in without
triggering any IHT via a chargeable lifetime transfer and they could
still take income and so long as they live 7 years the discounted
capital amount will be outside the estate too.

So doing the purchase in this way saves the difference £520,000 -
£150,000 = £370,000

I would have to pay CGT if I sold the house in the future for more
than £1.3m but equally if my parents still owned it on their death the
IHT liabilty would increase by the same amount.

Are my figures correct or have I missed something? What else should I
take into account?

Do their will make use of the Threshold to IHT available on the first
death?

 

[Mark]

You wont sell the house, and they end up in a smelly council home.

With £600K in savings? I doubt it.

M

 

[John Boyle]

With £600K in savings? I doubt it.

What 600k?

 

[Mark]

What 600k?

My mistake. I misread an earlier post.

M