Gifting a house

[megaphone]

We were discussing this down the pub, our parents are getting on in life and inheritance tax has been discussed.

What are the financial/tax/IHT implications of parents gifting their house to their children?

I'm assuming the 7 year rule kicks in re IHT?

CGT on any gain the children may make over the coming years?

The parents will need to pay a reasonable rent to the children as they are going to stay in the house?

Is there any stamp duty to pay on the transfer?

[Steffan]

I suggest you seek advice from a qualified Accountant. Eric Mc on here is widely regarded. You need to establish a deed of gift etc but if you intend to offer continued occuption by your parents then you need detailed advice. Done properly this is workable but you need specific personal financial advice. It is possible but as ever the devil is in the detail.

[megaphone]

Just a open discussion at the moment, looking at the feasibility, a couple of friends' parents are getting on and have some expensive houses.

[Eric Mc]

Where do the parents intend to live after the property is gifted?

[Tumbler]

The element families seem to forget to factor in is divorce, the parents old home will become a marital asset should the new owners divorce.

[megaphone]

Tumbler said:

The element families seem to forget to factor in is divorce, the parents old home will become a marital asset should the new owners divorce.

That's something to consider, also any bankruptcy may be an issue I'm guessing?

[megaphone]

Eric Mc said:

Where do the parents intend to live after the property is gifted?

We were discussing them staying there and paying a reasonable rent.

[Eric Mc]

megaphone said:

Eric Mc said:

Where do the parents intend to live after the property is gifted?

We were discussing them staying there and paying a reasonable rent.

What's reasonable?

It needs to be at a proper commercial rate or else there will be IHT and possible even PAYE implications. Of course, the new landlords will have to make self assessment tax returns and pay tax on the rental income they are receiving.
Finally, the property will almost definitely become liable to Capital Gains Tax when it is finally sold at a some future date (subject to whether any of the "children" eventually move in and it become their main residence)..

There are also issues around "deliberate impoverishment" when it comes to valuations for local health care assessments etc.

[anonymous-user]

megaphone said:

Eric Mc said:

Where do the parents intend to live after the property is gifted?

We were discussing them staying there and paying a reasonable rent.

They are going to give you the house and then rent it off you. Priceless Surely you could find your way to letting them stay their rent free for the rest of their lives!

[uknick]

If it is owned by the children there will be CGT when they come to sell it. I'm assuming no private resident relief as parents still live there. The gain can be reduced by annual allowances.

But, I'm puzzled why the parents would sell the house and then give the children rent, apart from the IHT issue of gifts with reservation.

Is the thinking, this is another way of giving more of the inheritance early without IHT?

But, if market rent is paid, is there going to be an issue with Schedule A rental income?

As said, professional advice is needed to ensure one tax is not removed and another introduced.


Edit: Sorry, just seen Eric's post, so duplicate advice

[megaphone]

Bluequay said:

They are going to give you the house and then rent it off you. Priceless Surely you could find your way to letting them stay their rent free for the rest of their lives!

Unfortunately it is the 'system' that dictates this. When you're looking at potential IHT bills in the £100k's then every avenue needs to be considered.

[madbadger]

Do you have to pay CGT if you win it off them in a game of poker?

[Eric Mc]

Yes - when you eventually sell it.

[Tonyc32]

uknick said:

Is the thinking, this is another way of giving more of the inheritance early without IHT?

Don't gift all the house, just some of it. Avoids most of the headache.

[tjl]

Presumably a matter that has been considered, but does the property fall within the current HMRC 650 k limits ?

"Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies - to as much as £650,000 in 2013-14. Their executors or personal representatives must transfer the first spouse or civil partner's unused Inheritance Tax threshold or 'nil rate band' to the second spouse or civil partner when they die." from hmrc website

[onomatopoeia]

Why does rent need to be charged? If I own a house, what is to stop me allowing someone to live there rent free?

(I don't own a spare house, I'm just curious why this gets mentioned a lot in this context)

[P1ato]

Because a gift where you continue to derive a benefit (i.e. live free of charge or even below an arm's length rent) is not considered a qualifying gift, according to the IHT legislation.

[Eric Mc]

HMRC are not mugs (mostly) and they know well enough that people would sometimes "give away" their assets whilst still using those self same assets. In other words, it wouldn't be a true gift at all. In legal terms it's called a "gift with reservation of title".

[megaphone]

tjl said:

Presumably a matter that has been considered, but does the property fall within the current HMRC 650 k limits ?

"Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies - to as much as £650,000 in 2013-14. Their executors or personal representatives must transfer the first spouse or civil partner's unused Inheritance Tax threshold or 'nil rate band' to the second spouse or civil partner when they die." from hmrc website

More than double that in one case. Houses in the South East worth £1m+ are not uncommon. Add other assets and potential IHT can run into £100ks.

[pacoryan]

megaphone said:

We were discussing this down the pub, our parents are getting on in life and inheritance tax has been discussed.

a: What are the financial/tax/IHT implications of parents gifting their house to their children?

b: I'm assuming the 7 year rule kicks in re IHT?

c: CGT on any gain the children may make over the coming years?

d: The parents will need to pay a reasonable rent to the children as they are going to stay in the house?

e: Is there any stamp duty to pay on the transfer?

In brief:

a) it depends on their individual situations, there are numerous potential implications several of which have been mooted already, professional legal advice is required but it can be done.
b) if successfully gifted and no reservation of benefit applies
c) only when they crystallise a gain, and if it was successfully gifted in the first place
d) they will need to paythe market rent to demonstrate it is not a gift with reservation of benefit
e) it depends on whether there is a mortgage on the property in question. If not, no.