Parents buying house for child and tax implications

[littlegreenfairy]

I am hoping the wonders of PH might be able to untangle these ramblings and be able to give some sage advice.

My parents are still concerned about their estate and wills and are going all around the houses for solutions to the inheritance tax situation. They also want to be able to help my husband and I buy a house (to see us settled) but in a tax efficient way.

They were thinking about buying us a house, I save a set amount of money a month (sort of like a mortgage) and should my mother need it when she's older I can help them out. (Dad isn't so worried about him as he'll have his pension, but if mum should be left alone then she loses a great proportion of the income as she was a typical 50's RAF housewife and didn't work)

Is there a legitimate tax efficient way that they can buy us a house but be able to call upon cash should they need it in later life? I fully expect mother to live with us if she's on her own and want to ensure she has a good standard of life.

Their current argument is that it is silly for them to have a wedge of cash they don't need sitting doing nothing when we're about to take on a huge mortgage and end up paying lots and lots of interest. The amount of the house will negate the inheritance tax limit so all would be happy there.

Who would you turn to for advice? It has been asked of me to sort this out and find a solution. Dad is losing sleep (turns 76 in 2 weeks and getting old is upsetting him) and mum is doing her nut. They worry about the future so much. They do not want to end up being investigated by HMRC and dad is the move above board sort of person you can imagine.

Also, if they were to set up a trust, what is the minimum number of trustees a trust can have?

Any help would be so greatly appreciated as I have no idea what the answer to this is or even where to start.

[slinky]

I may be wrong in saying this, so will happily be corrected, but any gift is not taxable unless the gifting party dies within 7 years of gifting. If a death does occur then the gift becomes liable to inheritance tax as part of the estate.

I don't know anything about the trust side of things though..

[Eric Mc]

Slinky is correct.

A parent can give anything they like to their children.

If they die within 7 years of making the gift, the value of the gift is deemed to still belong to the parent, so it will be included in the valuation of their estate for Inheritance Tax Planning.

[littlegreenfairy]

So is there anything stopping me from making savings that they can call on should they need some additional cash? Or would that count as them still having connection to the original cash and therefore not a good plan?

Dad is going through absolutely everything at the moment, the amount of paperwork he's putting into place is crazy. If it makes him feel better than it's not a bad thing.

The 7 year rule would be ok because I stand to inherit their house anyhow, so should something happen then I'd sell one to put the money back into the estate.

Thank you Eric and Slinky.

Can anyone see any pitfalls from this idea? I was thinking about some kind of legal agreement to state what happens if either my husband or I die, or if we divorce etc. Just to put everyone's minds at rest even if it does go tits up should something bad happen.

[slinky]

I'm not sure what would happen in terms of upward gifting (as it were).. Eric, any thoughts on that?

[BoRED S2upid]

I dont see a problem in any of this appart from the years thing and hopefully they won't pass away any time soon. They simply gift you the money to buy the house and int he future if they are strapped you pay for their keep in the future I dont see why you paying for their care is going to be an issue in the future everyone probably contributes to their elderly parents care in later years.

[littlegreenfairy]

I think Dad worked out a shortfall of about £4k a year if mum was on her own and nothing else changed. That isn't an awful lot to give to ensure a decent standard of living really...

It seems quite straight forward tbh. Thank you I can't really see anything else that needs to be addressed but you all have far more experience than I do so if there is anything that should be asked I'd be grateful to know what it is.

So would there be an issue with me paying them a regular amount of cash on a monthly basis? Would that then look like it was a loan rather than a gift?

Edited by littlegreenfairy on Wednesday 11th January 14:50

[Wings]

littlegreenfairy said:

So is there anything stopping me from making savings that they can call on should they need some additional cash? Or would that count as them still having connection to the original cash and therefore not a good plan?

Dad is going through absolutely everything at the moment, the amount of paperwork he's putting into place is crazy. If it makes him feel better than it's not a bad thing.

The 7 year rule would be ok because I stand to inherit their house anyhow, so should something happen then I'd sell one to put the money back into the estate.

Thank you Eric and Slinky.



Can anyone see any pitfalls from this idea? I was thinking about some kind of legal agreement to state what happens if either my husband or I die, or if we divorce etc. Just to put everyone's minds at rest even if it does go tits up should something bad happen.

One pitfall is if your relationship with your present partner breaks down, or through your demise your present partner remarries, in either event your father might not enjoy another male enjoying life at his expense.

[littlegreenfairy]

Yes Wings, this is something that we are having to discuss and come up with a way around it. Dad would not be thrilled!

[Wings]

I recently did a similar exercise to what your father has done, and whilst there were some gifted legal scholars, who were quite willing for a lot of shillings to draft all manner of complicated legal trusts. I never the less decided that I would rather be alive to both see my wishes granted, and my children enjoy their new found wealth.

As for my earlier post, thanking for accepting the same in the spirit I intended, for I also had to consider the question of “what if” with my children’s partners.

[fat80b]

Wings said:

I also had to consider the question of “what if” with my children’s partners.

Other things I was told to consider when discussing this with a Solicitor are:

1) You need to be a bit careful of the financial status of the child.
i.e. it will then be considered an asset of the child and should he/she go bankrupt / get into financial difficulties / get a mortgage on the property that then can't be met etc.....then things need to be carefully drafted to cover this.

2)Also, if the child dies before the parents, IHT can be payable in the other direction leaving the parents stuffed.

Use a trust and get a good Solicitor to sort it out.

No-one plans to get divorced / go bankrupt / die but it happens all of the time

Bob

[dirty boy]

Wings said:

One pitfall is if your relationship with your present partner breaks down, or through your demise your present partner remarries, in either event your father might not enjoy another male enjoying life at his expense.

My brother-in-law has borrowed £35,000 from his parents, I said to them, why not just gift it to him as he needs it, and they don't. (He has a decent pension income, still earning good money abroad, best part of £1m in building society)

His response was that he wasn't convinced the relationship between his son and wife would last, and he didn't want her getting anything if they split.

I can totally understand that.

My wife even said she wouldn't want nor expect the same amount in return as we don't 'need' it, and he did.

Quite a conundrum for a parent wanting to gift money but making sure it goes where they want it.

If it were me, i'd probably use it to pay off my children's mortgages, so at least their family home is safe and not exposed to future interest rate rises.

However, I suspect it'll be a long time coming before I have to worry about that.

[littlegreenfairy]

I'm not sure if this bit got lost in an edit but parents and I were wondering if there was some way I could pay them a monthly amount that wouldn't need to be taken into account for income purposes (for them) or for the house to appear as a loan for IHT purposes.

A proper above board way that is - HMRC and I have a good relationship (lovely helpful helpline!) and I'd like to keep it this way. Dad is an above board person but would hate to pay more tax than is necessary.

We are looking at having some legal agreement written up that sets out what would and wouldn't happen should my husband and I divorce...or if I die. That sort of malarky. There may be pitfalls for it to be contested, but it starts us all from the same place and sets the foundations for what would happen.

Thanks for all the advice and thoughts. Very much appreciated.

[Wings]

One is allowed to make annual gifts totaling 3k free of all tax, so with a partner you could gift 6k to your parents. One is also allowed, again tax free, regular payments/gifts of surplus monies, but once started they must be continuous to comply with the tax free rule.

I bought three of my children homes, and my son, although engaged to his partner, is not married, but I was quite happy to let his partner, to jointly own their home “as tenants in common”, with no preconditions.

I believe that when we reach your parents age, and we don’t want the tax man to have our monies, and we haven’t got the mind set to blow our monies away, then the only alternative is to give the to our child/ren. With what happens, happens!!

[madmover]

slinky said:

I may be wrong in saying this, so will happily be corrected, but any gift is not taxable unless the gifting party dies within 7 years of gifting. If a death does occur then the gift becomes liable to inheritance tax as part of the estate.

I don't know anything about the trust side of things though..

correct!

[1point7bar]

Paying your parents an income from your earnings is potentially tax inefficient.

UK trusts are taxed at 50%

Each parent can leave you 325K tax free.

Perhaps simply rent a house from them.

If their estate is more than 650K the tax exempt transfer (gift) route is available.

[mountview]

Have you looked at setting up a bare trust ? This means that your parents still have control but the property is out of their estate. I think the trust will have to pay certain taxes. Hope this helps a little.

[mountview]

Regarding 7 year potentially exempt transfers. Are you aware that there is tapering relief involved. So if before 7 years the parent passes away not all the gift will be liable for IHT.