Parents want to transfer property to grown up children

[JDO]

Both of my parents are now 70 years old.

The property they live in is mortgage free.

They would like to transfer the property to me and my two brothers (we are all over 18 years of age).

There preferred option is to rent the property to working professionals and to use the rental income as a means to pay rent on another smaller property for themselves.

I know they will be taxed on the rental income they receive, but I am not sure of the other tax implications (ie CGT or inheritance tax).

The property has a market value of £150k so I guess that there is no IHT liability...?

Can someone also explain the '7 year' rule...?



Any advice would be appreciated

John

[Tax Accountant]

Both of my parents are now 70 years old.

The property they live in is mortgage free.

They would like to transfer the property to me and my two brothers (we are all over 18 years of age).

There preferred option is to rent the property to working professionals and to use the rental income as a means to pay rent on another smaller property for themselves.

I know they will be taxed on the rental income they receive, but I am not sure of the other tax implications (ie CGT or inheritance tax).

The property has a market value of £150k so I guess that there is no IHT liability...?

Can someone also explain the '7 year' rule...?

Any advice would be appreciated

John

CGT: This applies to assets sold or transferred during their lifetime. If they have lived in the property throughout their ownership, there is no CGT on transfer to you as it is covered by their PPR relief.

IHT: There is no CGT at death. The tax applicable at death is IHT. The IHt exemption limit is presently £275,000. So long as their total assets, including the value of the property does not exceed the limit in force at the date of their death, there will not be any IHT.

7 Year Rule: If assets or money is gifted/transferred more than 7 years before death, it escapes IHT altogether. A graduating scale applies if the donor dies within 7 years of the gift.

If they transfer the property to you now, the rents from the property belongs to you and not them.

If they transfer the property to you and continue living in the property, the gift is ineffective for IHT purposes as this is ' Gift with Reservation of Benefit'. commonly referred to as GROB.

Without full details, it is best if they retain the property and continue to live in the property as their only or main residence. It does not make sense for them to rent out their property and they themselves moving into a rented property.

Ramnik

[JDO]

Thank you Karongo

As always your reply has been very helpful.

Cheers

John

[Tweedle Dum]

Any rental received will be taxable, leaving less to rent another property. The obvious solution is to sell the house, give you the cash on the understanding you purchase them another, smaller property which will belong to you and your siblings and then live their rent free.However I would tell them to retain ownership as the CGT on the property will begin to accrue when it is in your name. With it being so far from IHT levels it would be better for the house to rise in value whilst they own it not you.

[Tax Accountant]

Any rental received will be taxable, leaving less to rent another property. The obvious solution is to sell the house, give you the cash on the understanding you purchase them another, smaller property which will belong to you and your siblings and then live their rent free.However I would tell them to retain ownership as the CGT on the property will begin to accrue when it is in your name. With it being so far from IHT levels it would be better for the house to rise in value whilst they own it not you.

I can't see what this achieves. One is simply selling one house and buying another. If the money from the sale of 1st house is gifted to the son on the understanding that the son gives back the money for the purchase of another house, it is questionable whether the gift will be effective for IHT purposes. In any case, if the whole estate is within the IHT threshold, there is no point in engaging in such schemes.

The father should simply do what suits him best, ie stay put or move. However, it is best to keep the ownership in father's own name for CGT purposes. But one should remember that CGT is only an issue if one sells within lifetime as there is no CGT at death, instead IHT becomes relevant.

Ramnik

[Tweedle Dum]

I can't see what this achieves. One is simply selling one house and buying another. If the money from the sale of 1st house is gifted to the son on the understanding that the son gives back the money for the purchase of another house, it is questionable whether the gift will be effective for IHT purposes. In any case, if the whole estate is within the IHT threshold, there is no point in engaging in such schemes.




The house doesn't come into the IHT threshold so I presume there are other reasons for them passing on their inheritence now. As I concluded at the end of my post, the parents are better off holding the property in their names.

[Tax Accountant]

One other issue which needs to be considered is the ownership of properties and care home fees.

If one owns the property, the local authority takes a charge over the property to cover care home fees. If it is gifted to avoid care home fees in the near future, the transfer could be made ineffective by the local authority.

However, if it it gifted for other reasons, and this could be clearly evidenced, the property may escape from being caught to cover the care home fees.

In a recent Panaroma documentary, it was suggested that local authorities were acting illegally in forcing homeowners to sell their properties to pay care home fees.

Ramnik

[JDO]

What are the other reasons that the property could be transferred and what is acceptable evidence to avoid care home costs?

Regards

John

[Tax Accountant]

What are the other reasons that the property could be transferred and what is acceptable evidence to avoid care home costs?

Regards

John

Sorry, not my expertise. Is this the real reason for the intended transfer in your case? I am sure if you search the internet, there will be plenty of information on the subject.

Ramnik