inheritance tax


A

amit.chauhan

The scenario is a bit complicated and is as follows:

- My parents purchased our family home about 25 odd years ago and this
was an interest only mortgage.

- About eight years ago they decided to re mortgage and try for a
repayment mortgage as they had paid years of interest and weren't any
closer to owning their house. The problem was that because of their
age at the time they could only afford an interest only mortgage or so
they thought. The only way they could obtain a repayment mortgage was
to include me as part of the mortgage policy. As I was still living at
home and was contributing to upkeep of the family home, we decided to
take out a three way mortgage with a 'joint tenancy' agreement.

- About three years ago we paid the mortgage off, I paid about 90
percent of the core amount and my parents paid about 10 percent.

- Ten months ago I bought a flat and moved into it with my wife.

- If something was to happen to one of my parents I plan to move back
into the family home with the remaining member.

My parents are getting old and would like to ensure I inherit the
family home without being hit with a massive tax bill.

How can I ensure that I don't end up in a capital gains/inheritance
tax nightmare?
 
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G

google.2.zolpot

How can I ensure that I don't end up in a capital gains/inheritance
tax nightmare?
You will have an accounting nightmare, regardless.

Assuming that you are on title to the house as a joint tenant with
right of survivorship (or, with some other issues to deal with, as a
tenant in common) then you need to be able to prove who paid what, and
when. It is then a theoretically trivial but practically difficult
(unless you have the right software or can programme a spreadsheet for
the purpose) to get the current value of the contributions and to
determine who "owns" what percentage.

The inherited percentage gets a step up for capital gains tax purposes
but is subject to IHT, with due allowance for the £275,000 (or
whatever it is at the relevant time) exemption.

Any gift by your parents to you is a gift subject to reservation and
is subject to CGT.

If the ownership percentage does not accord with the actual cash
disbursed then the overpayment could be deemed a gift or a loan, as
the case may be. This is why it is well to have a document drawn up by
a solicitor and/or barrister qualified in real estate and tax matters.
The title to the house should be coordinated with your parents' wills.
A decision needs to be made how to bequeath enough of the house to you
to take advantage of the step-up in basis for CGT and also benefit
from the unlimited marital deduction for IHT purposes. On the latter,
the point is to benefit from the £275,000 (or whatever) allowance of
the surviving parent. If you think house prices will escalate further,
then you should be less anxious about having to pay 40% (or whatever)
IHT.

There are other issues: the possibility of giving you the house and
the parents living elsewhere and suriving 7 years (a PET). The
possibility of your dying first and your parents inheriting from you
(you can deal with that via a trust and life assurance to pay the tax;
but you need to consider in any case who -- other than the Crown --
should get the assets if you predecease your parents, etc.

I've written the above in haste and it should not be taken as legal
advice -- only a statement of issues to consider.
 
R

Ronald Raygun

The scenario is a bit complicated and is as follows:

- My parents purchased our family home about 25 odd years ago and this
was an interest only mortgage.

- About eight years ago they decided to re mortgage and try for a
repayment mortgage as they had paid years of interest and weren't any
closer to owning their house.
I'd have thought they would have been a lot closer to owning their house,
since surely 17 years of inflation would have eroded the "real" value of
their original debt significantly.
The problem was that because of their
age at the time they could only afford an interest only mortgage or so
they thought. The only way they could obtain a repayment mortgage was
to include me as part of the mortgage policy. As I was still living at
home and was contributing to upkeep of the family home, we decided to
take out a three way mortgage with a 'joint tenancy' agreement.

- About three years ago we paid the mortgage off, I paid about 90
percent of the core amount and my parents paid about 10 percent.
Could you not therefore be deemed to have bought a share of the house,
equal to about 90% of the loan 8 years ago divided by the house value
3 years ago?
- Ten months ago I bought a flat and moved into it with my wife.

- If something was to happen to one of my parents I plan to move back
into the family home with the remaining member.

My parents are getting old and would like to ensure I inherit the
family home without being hit with a massive tax bill.

How can I ensure that I don't end up in a capital gains/inheritance
tax nightmare?
How much is the house worth? What fraction of it do you already own?
Apart from the house, what is the value of the rest of your parents'
assets?
 
J

John Boyle

Any gift by your parents to you is a gift subject to reservation and
is subject to CGT.
No CGT would be payable by them as it is their principle residence.
However Pre Owned Asset Tax may become due.
 
J

John Boyle

In message said:
- About three years ago we paid the mortgage off, I paid about 90
percent of the core amount and my parents paid about 10 percent.

- Ten months ago I bought a flat and moved into it with my wife.

- If something was to happen to one of my parents I plan to move back
into the family home with the remaining member.

My parents are getting old and would like to ensure I inherit the
family home without being hit with a massive tax bill.

How can I ensure that I don't end up in a capital gains/inheritance
tax nightmare?
Switch to tenants in common.

Apportion it to take make full use of your CGT allowance bearing in mind
it was your principle residence for all but the last 10 months, which
will likely mean you could give away most, if not all, of your share.

Give them the biggest share. They write mirror wills using a
discretionary trust and an IOU backed by a legal charge. When the first
dies their share goes to the other parent but the parent owes the Trust
the value of the share. When the survivor dies the debt is repaid first.
So long as the house is worth less than £600,000 there will be no IHT or
CGT to pay on it.
 
R

Ronald Raygun

John said:
Switch to tenants in common.
OK

Apportion it to take make full use of your CGT allowance bearing in mind
it was your principle residence for all but the last 10 months, which
will likely mean you could give away most, if not all, of your share.

Give them the biggest share. They write mirror wills using a
discretionary trust and an IOU backed by a legal charge. When the first
dies their share goes to the other parent but the parent owes the Trust
the value of the share. When the survivor dies the debt is repaid first.
So long as the house is worth less than £600,000 there will be no IHT or
CGT to pay on it.
Seems a bit complicated, and all this discretionary trust stuff feels
like the sort of dodgy loophole which government might be minded to plug
in the not too distant future.

Of CGT and IHT, CGT seems to be the less pressing enemy, so why not
apportion it so that the parents' shares are such as to make optimum
use of their IHT allowances, and have them leave their shares directly
to the OP? That way, so long as the house (plus rest of parents' estate)
is worth less than 600k (or will be worth less than twice whatever the
NR^H^Hthreshold will be at the relevant time), there will be no IHT to
pay.

There may not be a lot of flexibility in how the apportioning could (as
opposed to should) be done, unless he either buys into a bigger share or
is gifted some more of it.
 
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J

John Boyle

Ronald said:
Seems a bit complicated,
Simps! and it works!
and all this discretionary trust stuff feels
like the sort of dodgy loophole which government might be minded to plug
in the not too distant future.
They've been saying that for years and years and years and the
Phizackerly case gave it more credence.
Of CGT and IHT, CGT seems to be the less pressing enemy, so why not
apportion it so that the parents' shares are such as to make optimum
use of their IHT allowances, and have them leave their shares directly
to the OP? That way, so long as the house (plus rest of parents' estate)
is worth less than 600k (or will be worth less than twice whatever the
NR^H^Hthreshold will be at the relevant time), there will be no IHT to
pay.
No. An error there RR. When the first dies their share will pass to the
OP. The survivor, by living in both halves, develops an interest in
possession in that half and so on death their estate will be taxed as
though it owns it, even though it doesnt.
 
R

Ronald Raygun

John said:
No. An error there RR. When the first dies their share will pass to the
OP. The survivor, by living in both halves, develops an interest in
possession in that half and so on death their estate will be taxed as
though it owns it, even though it doesnt.
Not so! The OP will by then have moved back in with the survivor.
 
G

google.2.zolpot

John Boyle wrote: ....

Seems a bit complicated, and all this discretionary trust stuff feels
like the sort of dodgy loophole which government might be minded to plug
in the not too distant future.
....

The problems of DIY and naive trust planning are shown by the
Phizackerley case discussed here:
http://tinyurl.com/ytucb7
Full text of case here:
http://tinyurl.com/24w5zt

Short of a sophisticated sale or trust arrangement with full rent paid
(and tax income paid on that rent) any transfer of ownership is likely
to be ineffectual for saving tax.

The Inland Revenue practice on attributing and valuing joint property
is here:
http://www.hmrc.gov.uk/cto/customerguide/page7.htm

The rules formerly on owned property trasferred with a reservation of
benefit are traps for the unwary. (In the USA there is specific
legislation (e.g., QPRT "qualified private residence trust", which is
as close as the USA gets to the UK "PET" concept) that won't help
you; but at least the IRS provides better guidance:
http://tinyurl.com/yq6o7q (Treas. Reg. ¶ 20.2040-1 Joint interests))
It should come as no surprise to learn that the US and UK treasury tax
specialists talk to each other to compare notes on tax avoidance
issues.

Note that principal residence exemption from CGT may, with the right
facts, be pro-rated, and the last three years of rental may be ignored
for CGT purposes.

As I said, this is not a DIY project.
 
A

amit.chauhan

...

The problems of DIY and naive trust planning are shown by the
Phizackerley case discussed here:http://tinyurl.com/ytucb7
Full text of case here:http://tinyurl.com/24w5zt

Short of a sophisticated sale or trust arrangement with full rent paid
(and tax income paid on that rent) any transfer of ownership is likely
to be ineffectual for saving tax.

The Inland Revenue practice on attributing and valuing joint property
is here:http://www.hmrc.gov.uk/cto/customerguide/page7.htm

The rules formerly on owned property trasferred with a reservation of
benefit are traps for the unwary. (In the USA there is specific
legislation (e.g., QPRT "qualified private residence trust", which is
as close as the USA gets to the UK "PET" concept) that won't help
you; but at least the IRS provides better guidance:http://tinyurl.com/yq6o7q(Treas. Reg. ¶ 20.2040-1 Joint interests))
It should come as no surprise to learn that the US and UK treasury tax
specialists talk to each other to compare notes on tax avoidance
issues.

Note that principal residence exemption from CGT may, with the right
facts, be pro-rated, and the last three years of rental may be ignored
for CGT purposes.

As I said, this is not a DIY project.
Can you recommend a company who can deal with my case?
 
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A

amit.chauhan

Can you recommend a company who can deal with my case?- Hide quoted text -

- Show quoted text -
The value of my family home is £500, 000 and both of my parents have
been working for 30 odd years so I hope the case quoted doesn't apply.
My parents don't have any other assets.
The property is currently held as 'joint tenants'. My understanding is
if something happens to one of us, their portion transfers to the
surviving members.

If we switch to a three way tenants in common and my parents write a
will to transfer their portion (a third) to me, will this work from an
IHT perspective?

I plan to live in the property and have no intention of selling it.
Therefore I don't believe I will need to pay CGT or have I got the
wrong end of the stick?
 
J

John Boyle

In message said:
NOTE: you have wrongly attributed me here.
The problems of DIY and naive trust planning are shown by the
Phizackerley case discussed here:
http://tinyurl.com/ytucb7
Full text of case here:
http://tinyurl.com/24w5zt
True , but Prof Phizakerly's case was somewhat unusual with regard to
his and his wife's lifetime earnings and the way they conducted the
financial affairs and the domestic accommodation arrangements.

The failure of this case should dissuade those who are considering using
the discretionary trust route so long as care is applied.
Short of a sophisticated sale or trust arrangement with full rent paid
(and tax income paid on that rent) any transfer of ownership is likely
to be ineffectual for saving tax.
Agreed (assuming you mean in lifetime)
Note that principal residence exemption from CGT may, with the right
facts, be pro-rated, and the last three years of rental may be ignored
for CGT purposes.
No, it is the last three years of total 'ownership' that is disregarded,
not the 'rental' period and then only if it has been the principle
private residence at some time.
 
J

John Boyle

The value of my family home is £500, 000 and both of my parents have
been working for 30 odd years so I hope the case quoted doesn't apply.
Yes, it is unlikely that the somewhat unusual circs of Phizackerley
would apply here.
My parents don't have any other assets.
The property is currently held as 'joint tenants'. My understanding is
if something happens to one of us, their portion transfers to the
surviving members.
Thats right. But HMR&C assume that the deceased has an equal share in
jointly owned properties and this value is included in the taxable
estate but the bit that passes to a surviving spouse is disregarded. The
bit that passes to you would be potentially taxable but in view of the
property value not IHT would be payable.
If we switch to a three way tenants in common and my parents write a
will to transfer their portion (a third) to me, will this work from an
IHT perspective?
Probably. See my other post.
I plan to live in the property and have no intention of selling it.
Therefore I don't believe I will need to pay CGT or have I got the
wrong end of the stick?
No, you seem to ahve grasped it. AIUI you will only have out of it for
about 8 months or so wont you? The gain in that period is likely to be
below your CGT allowance
 
T

Tim

... AIUI you will only have out of it for about 8 months or so wont you?
...
Didn't he say that he'd already been out of it for 10 months, and only
plans to move back if "something was to happen to one of [his] parents" ?
 
J

John Boyle

[QUOTE="Tim said:
... AIUI you will only have out of it for about 8 months or so wont you?
...
Didn't he say that he'd already been out of it for 10 months, and only
plans to move back if "something was to happen to one of [his] parents" ?
[/QUOTE]
Yes, I didnt have the original post and was relying on a failing memory.
The post to which I was replying says he wont be selling the property so
CGT shouldnt matter to him.
 
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A

amit.chauhan

[QUOTE="Tim said:
... AIUI you will only have out of it for about 8 months or so wont you?
...
Didn't he say that he'd already been out of it for 10 months, and only
plans to move back if "something was to happen to one of [his] parents" ?
Yes, I didnt have the original post and was relying on a failing memory.
The post to which I was replying says he wont be selling the property so
CGT shouldnt matter to him.[/QUOTE]

I'm a bit confused , are saying that if I sold the property I would
possibly have to pay CGT on the gain for the period I lived out of the
house? Correct me if I'm wrong but if I don't sell the property then I
don't need to pay any CGT period.
 
J

John Boyle

In message said:
Tim <m...@home.uk> said:
... AIUI you will only have out of it for about 8 months or so wont you?
...
Didn't he say that he'd already been out of it for 10 months, and only
plans to move back if "something was to happen to one of [his] parents" ?
Yes, I didnt have the original post and was relying on a failing memory.
The post to which I was replying says he wont be selling the property so
CGT shouldnt matter to him.
I'm a bit confused , are saying that if I sold the property I would
possibly have to pay CGT on the gain for the period I lived out of the
house?
Potentially.
Correct me if I'm wrong but if I don't sell the property then I
don't need to pay any CGT period.
Thats what I said.
 
R

Ronald Raygun

John said:
So there would then be a situation of two joint owners (surviving parent
and son) occupying the property together, and so the surviving parent
would not be treated as "living in both halves" in the same way as if
living in it alone (and not paying market rent to the son for his or her
use of the son's half of the house).
 
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J

John Boyle

Ronald said:
So there would then be a situation of two joint owners (surviving parent
and son) occupying the property together, and so the surviving parent
would not be treated as "living in both halves" in the same way as if
living in it alone (and not paying market rent to the son for his or her
use of the son's half of the house).
Again, so what?
 
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