Understanding for I H T

[GJMSurrey]

Hi everyone,

Would anybody be willing to confirm/not my basic understanding below?

If a parents main residence was sold below its market value to a child, who would then live in the property as a main residence, I assume no C G T or other taxes would apply.

I H T could later apply based upon the MARKET (not the sales value agreed) at a decreasing scale should the parents unfortunately pass within 7 years.

The I H T bill would need to be met via sale of the property if said child could not raise funds to meet this bill via other means.

I am not sure, however, how the market value should best be evidenced as the property is unique in it's size/location and the true market value could be interpreted in various ways. Is a simple estate agent valuation the correct way to do this, or what other options are available?

Regards

[Telometer]

Market value is exactly that; you pay a surveyor for a valuation.

If the parents continue to live there, then you are sailing into a can of worms and would be best advised not to touch it with a barge pole. Inter alia:

1. There is a gift with reservation of benefit, so it doesn't go outside the parents' estate after 7 years for IHT purposes.
2. It does however become the child's for CGT purposes.
3. There is likely to be pre-owned asset tax to pay unless the parents pay rent to the children.

[jeffrey]

you are sailing into a can of worms and would be best advised not to touch it with a barge pole.
"Hello, is that the Mixed Metaphors Hotline? Can you send out an emergency team, please?"

[GJMSurrey]

Thank you very much for responding to this.

Do to clarify, it is true that the parents would not live there (we were aware of this 'sailing worm pole' of a problem!).

The parents would physically move out (buy another property) and sell o their child for let's say £500k, while at the same time obtaining a written survey of the properties market value which would be let's say £1 million, so that I H T can be properly calculated later if necessary.

I presume that because the property moves from being the parents main residence to the childs main residence, that no CGT will apply to the child should they sell it many years later.

Am I correct of the CGT statement?

[jeffrey]

I cannot answer re IHT; but, re SDLT, P will be exposed to tax @3% on the £500 000.00.

[Telometer]

Some more general thoughts; you will of course be consulting a tax expert.

How exactly is the property the child's main residence, but not the parents'? Wouldn't your fancy planning be better if the child were to rent out the property and earn income, rather than live there? (Though note the income would be taxable on the parents to the extent it arises from their gift.)

Where does the child get the money?

No point getting the valuation at the time. Only bother with the expense if parents die young - at which point a retrospective valuation will be fine.

[GJMSurrey]

There will be a tax expert involved, perhaps even from these forums. At present it's a sense check to see if it is even feasible so sorry for being vague.

At present the home is the parents, then if the home were sold to the child, said child would live there. Therefore along with the commercial transaction the property would move from the parents main residence/home to the child main residents/home (the parents would move on and buy/live elsewhere).

The overall rationale I guess is that the parent would initially like to pass over their home to the two children on a 50/50 basis. However, there is room for conflict here what with sharing and possible changing childrens expecattions and lifestyles, and while the simplest solution may appear to be to sell and split the proceeds, one child would actually really like to live in and maintain the many year-old family home.

That child would rather sell their own home to make the 50% figure of the parents home, buy it for such amount, and the parent could pass that 50% value of proceeds to the other child as a gift afterwards.

Both children then receive the same 'asset/value' and also retain their own equal liabilities in terms of I H T on their respective shares. There is no toe-treading either.

Rental was an idea, but in reality if it were the business/income required then you would sell up and buy hwoever 5 smaller HMO properties where return on investment was more positive.

I am not sure if this helps explain a little?

Thanks for the comment about retrospective valuation, that's interesting to know.

Thank you both - noted about SDLT too Jeffrey

[Telometer]

I repeat:

How exactly is the property the child's main residence, but not the parents'? Minors are going to be living on their own? Really? And the parents will never stay there?

Where does the child get the money?


Why not sell the house and give the children half a million. Buy them a flat each and rent it out. Why keep the family home - purely for sentimental reasons I bet.

[GJMSurrey]

Ahhh, sorry for my confusion. When I say "Child" I meant a 37 year old. I should have made this clear, sorry. She would essentially sell her own home, buy the parents half price and those proceeds go to the other child (40!).

Correct about the sentimental reasons. Although also it's a rather unique property in an excellent location that would be hard to match even if having the same value in funds.

If the idea was too complicated i'm sure it would be sold, but at this stage are sense checking the feasibility and implications of not selling.

[Telometer]

Well it all begins to make so much more sense. http://www.nspcc.org.uk/Inform/research/questions/definition_of_a_child_wda59396.html

No mixed bargepoles then. A straightforward sale to a child for £500,000 (SDLT at 3% applies = £15,000). And a straightforward gift to the other party of 500k.

Consequences for parent making disposal: No CGT if PPR applies to property. IHT PET.

Gifts should be made by parent more likely to survive 7 years. You could take out life insurance to cover the IHT bill. Alternatively, gifts if made by both parents would limit exposure on these gifts.


Remember, though IHT taper relief is a limited blessing on smaller gifts. Threshold 325k. So on a gift of 500k, for a person dying before the 7 years are up, only 175k is tapered. If there's just one parent who is donor of £1m, then 675k is tapered. All a gamble, but you can insure against IHT bills.

[GJMSurrey]

Great, all noted with thanks. Particularly the combining of thresholds. Thanks for your time

[jeffrey]

Further to post #10: remember that there's no SDLT on a gift of unmortgaged property.