Parents moving in - IHT Rules

[jdwoodbury]

Not a part of taxation law I am familiar with but I wanted some opinion on this to go from (professional advise will be sought nearer the time).

Looking to buy a larger family home in the next 12-18months (circa £600k). Potential for my wifes parents (63 and 68) to come live with us as some point in the near future. As part of this move they will contribute £100k from the sale of their house to some renovation/extension as needed to make it workable for the family.

As I understand it I may be liable for IHT on the portion of their investment into our home once they both die (morbid...but you have to think of these things), else if I dont they will be liable for income tax on the benefit of living rent free. Now what is not clear if how this portion of IHT is worked out, is it on the full value of the home or the value of their £100k investment. If it's the former I am concerned as the house will be worth more than the IHT limit at this time (currently £650k)

This is not a thread about the choice of living with your in-laws BTW, but I welcome and opinion from people in the know about these types of taxation issues.

Regards,

JD

[pacoryan]

Will you own the house before they sell up and give you £100k?

I suspect that if the gift is used by you to purchase the property then Income Tax may be due unless they pay a market rent or go on the deeds.

If you own it already, and they give you £100k, the 7 yr clock starts.

If they are not named on the deeds IHT on the new property is not an issue.

If you buy it with their money, you can split the tenure on the deeds according to the percentage value they have purchased and IHT will be calculated on that percentage of the value upon their demise.

Lots of advice required.

Thought about BTL'ing their current place and releasing the £100k that way?

(IANAL)

[jdwoodbury]

Thanks Pacoryan

My undertanding was if I owned the home 1st income tax would need to be paid once my parents lived with me as it would be treated as a 'pre-owned asset'. If we both sell up and pool our funds IHT would be liable but not income tax, you answered my question about how this is calculated though through a split on the tenure...I expect this will rise as the overall house value rises.

[pacoryan]

I think it hinges around whether the funds can be identified as having been invested in the property, which if you use them for improvements would be difficult to argue.

Is the parental estate likely to give rise to IHT issues? (no need to answer!) This might inform the strategy though.

Even the HMRC pages seem to be vague, with plenty of "you may be liable" type of statement!!

[jdwoodbury]

Yeah I read those pages and I am none the wiser!

[Ollerton57]

If the parents gift you £100k, then that will be potentially liable to IHT (if it applies) and if both parents die within 7 years. I'm assuming you're not having them written into the deeds of the house?!

Remember that the IHT limit transfers to the surviving spouse on first death and is then effectively doubled i.e. IHT limit goes from £325k to £650k - if that changes anything.

[pacoryan]

Almost - ifthey give him £100k which is then invested in the house they all live in, Pre-Owned Asset treatment applies.

I was wondering if the £100k was given after the house was bought and the funds could not be identified a being invested in the property, PET rules would apply. I'm not convinced the OP will be able to do this though.

[Ollerton57]

pacoryan said:

Almost - ifthey give him £100k which is then invested in the house they all live in, Pre-Owned Asset treatment applies.

I was wondering if the £100k was given after the house was bought and the funds could not be identified a being invested in the property, PET rules would apply. I'm not convinced the OP will be able to do this though.

Does that apply if it is a cash gift which is then used to extend an already purchased house which has always been owned by the OP? That's what looks to be the case here? maybe I've read it wrong.

[uknick]

He is buying a new house and intends to use parent's money to build an enhancement.

One other thing to think about is "deprivation of assets" with regard to council and possible care home fees. Although, given your parent's ages, one assumes care home fees are not on the horizon.

[pacoryan]

Ollerton57 said:

pacoryan said:

Almost - ifthey give him £100k which is then invested in the house they all live in, Pre-Owned Asset treatment applies.

I was wondering if the £100k was given after the house was bought and the funds could not be identified a being invested in the property, PET rules would apply. I'm not convinced the OP will be able to do this though.

Does that apply if it is a cash gift which is then used to extend an already purchased house which has always been owned by the OP? That's what looks to be the case here? maybe I've read it wrong.

If the cash is used to invest in the property and the chargeable person then lives there, I think it will meet the Contribution Condition and POA treatment applies.

HMRC stuff

The donee is reserving an indirect benefit from the gift.

[Ollerton57]

pacoryan said:

Ollerton57 said:

pacoryan said:

Almost - ifthey give him £100k which is then invested in the house they all live in, Pre-Owned Asset treatment applies.

I was wondering if the £100k was given after the house was bought and the funds could not be identified a being invested in the property, PET rules would apply. I'm not convinced the OP will be able to do this though.

Does that apply if it is a cash gift which is then used to extend an already purchased house which has always been owned by the OP? That's what looks to be the case here? maybe I've read it wrong.

If the cash is used to invest in the property and the chargeable person then lives there, I think it will meet the Contribution Condition and POA treatment applies.

HMRC stuff

The donee is reserving an indirect benefit from the gift.

Saying that, there is this paragraph in the example provided:

However, the contribution condition is not met where the chargeable person resides in property purchased by another with money loaned by the chargeable person. This is because the outstanding debt will form part of the lender’s estate for Inheritance Tax purposes, and the lender cannot be said to have provided a contribution to the purchase of that property when that money has to be repaid to them, even if the loan was interest free. It follows that the 'lender', in such an arrangement, is not subject to a POA charge.

OP - Do you have any view on repaying the amount back? It looks like even minimal repayments (could you offset rent - pacoryan?) would result in IHT on the outstanding loan/gift amount only and not on the asset.

[pacoryan]

As broad as it is long because the value of the debt reverts back to the parent's estate, and IHT applies.

There is something about the gift being used to care for the parent, but this is qualified by saying the purchase of land or property would be difficult to justify as a care expense. There appears to be case law, but even the HMRC site then recommends specialist guidance!!

Where's the tax lawyers when you need them?!!!

[jdwoodbury]

I dont have any intention of paying back the £100k, it is a gift from them. I am seeking out specialist IFA advice now as this is a tricky subject....will report back.