Discussion
My friend has reached agreement with her aged father to purchase his home of 33 years for £1. Whilst mentally sound, his physical health is very poor and in all likelihood he is well within the last seven years of his life.
Obviously his bungalow has a market value much greater than £1. Is what she's planning tantamount to tax evasion?
Obviously his bungalow has a market value much greater than £1. Is what she's planning tantamount to tax evasion?
Wouldn't have thought so, but if he does die within 7 years the tax man may decide the property was transferred to avoid IHT and add it or a proportion of it to the estate value.
IANAL- if there are reasonable sums involved, over and above the IHT threshold, it's going to be worth seeking advice from a solicitor and/or accountant now rather than dealing with the aftermath.
IANAL- if there are reasonable sums involved, over and above the IHT threshold, it's going to be worth seeking advice from a solicitor and/or accountant now rather than dealing with the aftermath.
Cider Andy said:
My friend has reached agreement with her aged father to purchase his home of 33 years for £1. Whilst mentally sound, his physical health is very poor and in all likelihood he is well within the last seven years of his life.
Obviously his bungalow has a market value much greater than £1. Is what she's planning tantamount to tax evasion?
I don't know the specific rules, but I recall that in such circumstances the SDLT would be calculated on the market value of the property, and not the purchase prices. As long as the proper rate of SDLT is paid, then there shouldn't be a tax evasion claim.Obviously his bungalow has a market value much greater than £1. Is what she's planning tantamount to tax evasion?
Also, beware of IHT rules, if the house is being gifted within 7 years of death.
Others, more qualified will be along to advise better, I'm sure.
Mandat said:
I don't know the specific rules, but I recall that in such circumstances the SDLT would be calculated on the market value of the property, and not the purchase prices. As long as the proper rate of SDLT is paid, then there shouldn't be a tax evasion claim.
Also, beware of IHT rules, if the house is being gifted within 7 years of death.
Others, more qualified will be along to advise better, I'm sure.
Correct, AFAIK.Also, beware of IHT rules, if the house is being gifted within 7 years of death.
Others, more qualified will be along to advise better, I'm sure.
Whether your friend pays a quid or gets gifted the house is immaterial to the implications for inheritance tax if it falls into the 7-year window. Market value will be used to calculate the amount of tax.
Cider Andy said:
It comes in well below the Inheritance Tax threshold, having a value of only c. £130k. I was thinking more along the lines of her evading Capital Gains Tax.
Wouldn't it be the other way around; if she buys it for £1 now she will become liable for a massive CGT liability when she sells (assuming it's not her main residence), whereas if it stays in father's ownership and estate is well below IHT threshold she won't have any liabilities when he dies?What's the intended purpose of the transaction?
Mandat said:
Cider Andy said:
My friend has reached agreement with her aged father to purchase his home of 33 years for £1. Whilst mentally sound, his physical health is very poor and in all likelihood he is well within the last seven years of his life.
Obviously his bungalow has a market value much greater than £1. Is what she's planning tantamount to tax evasion?
I don't know the specific rules, but I recall that in such circumstances the SDLT would be calculated on the market value of the property, and not the purchase prices. As long as the proper rate of SDLT is paid, then there shouldn't be a tax evasion claim.Obviously his bungalow has a market value much greater than £1. Is what she's planning tantamount to tax evasion?
It can get a bit complicated if the actual selling price consists of more than just cash, and includes other forms of consideration. For example if the house has a mortgage and the new owner takes over the mortgage payments, then the outstanding mortgage would be counted as part of the selling price. And HMRC are wise to the trick of selling the house for a pound provided you also buy the carpets and curtains for half a million quid - the amount you pay for the carpets over their true value would be counted as part of the selling price. If he continues to live in the house rent free then I'm not sure if the implied value of the free rent he's getting would be counted for stamp duty purposes - it might be.
But if it's a genuine unconditional gift or a sale for a pound with no strings attached then no stamp duty would be payable ( link).
Inheritance tax is trickier - if it's sold for less than its market value and he dies within 7 years of the sale, the difference between the sale price and the market value would be counted as a gift, and would potentially be subject to inheritance tax. If he continues to live in the house rent free then it might be a problem even if he lives more than 7 years - a gift must be unconditional ("giving with warm hands") to be exempt from IHT.
There may also be issues with deprivation of assets if he disposes of his assets at less than their true value and knows (or should know) that there's a likelihood that need social care or residential care in future.
She's already the major beneficiary in his will, @ 80% with 10% each going to her estranged siblings. The purpose of the transaction is to avoid having to buy the 20% her siblings would inherit upon her father's death. It would become her main residence so should not attract Capital Gains Tax if she were ever to sell it.
So. It would appear if she were to pay 2% Stamp Duty Land Tax on any value in the property over £125k there should be no other tax implications?
So. It would appear if she were to pay 2% Stamp Duty Land Tax on any value in the property over £125k there should be no other tax implications?
Aretnap said:
There may also be issues with deprivation of assets if he disposes of his assets at less than their true value and knows (or should know) that there's a likelihood that need social care or residential care in future.
This is the huge risk in this situation.Right now, the father has assets of £130k. If he goes into a care home tomorrow, he's paying for his own care until his assets go down to about £20k, then he part-pays until he gets down to about £15k.
If he rocks up at the care home tomorrow, and the daughter says "No, he doesn't own any assets...", then she's deliberately trying to persuade the council tax payers of the area to subsidise his "inheritance"... Very, very dim view taken of that - rightly.
BTW - paying a quid makes no difference. It could be a gift, and exactly the same situation would apply.
Edited by TooMany2cvs on Monday 12th September 12:12
Aretnap said:
There may also be issues with deprivation of assets if he disposes of his assets at less than their true value and knows (or should know) that there's a likelihood that need social care or residential care in future.
Hear different things about this - in the place my Mum is in there's only 3 residents paying their own fees, the others who had houses and money all quietly got rid of it.However they are supposed to be clamping down hard on this and they could come after the daughter for the fees.
TooMany2cvs said:
This is the huge risk in this situation.
Right now, the father has assets of £130k. If he goes into a care home tomorrow, he's paying for his own care until his assets go down to about £20k, then he part-pays until he gets down to about £15k.
If he rocks up at the care home tomorrow, and the son says "No, he doesn't own any assets...", then he's deliberately trying to persuade the council tax payers of the area to subsidise his "inheritance"... Very, very dim view taken of that - rightly.
The plan is for him to continue to live there until he dies. Whilst there is no plan for him to go into a care home he does have other assets to cover that cost.Right now, the father has assets of £130k. If he goes into a care home tomorrow, he's paying for his own care until his assets go down to about £20k, then he part-pays until he gets down to about £15k.
If he rocks up at the care home tomorrow, and the son says "No, he doesn't own any assets...", then he's deliberately trying to persuade the council tax payers of the area to subsidise his "inheritance"... Very, very dim view taken of that - rightly.
Cider Andy said:
The plan is for him to continue to live there until he dies.
Plans change as health fails.Cider Andy said:
Whilst there is no plan for him to go into a care home he does have other assets to cover that cost.
If he has sufficient assets to cover an extended stay in a care home - my MiL was in one for seven years, and if you've not looked at prices yet, you will be horrified - then IHT may VERY well be an issue.Gassing Station | Speed, Plod & the Law | Top of Page | What's New | My Stuff