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Reservation of Benefit (GWROB)/Inheritance Tax (IHT)
David Matthews
Posted: 03 April 2018 11:50:17(UTC)
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Hi all,
Similar questions have been asked before but i have not seen one comparable to my situation.

My parents are separating and my Mother wants to remain in the house (Father happy to leave). The house is worth £100,000 and they owe around £20k on their mortgage.
I have offered to buy the house for £40k meaning they will each get £10k after the mortgage balance is cleared.

I want my mother to live in the house rent free but of course i am aware of gifting rules around IHT and understand that there are GWROB implications however i'm struggling to see how this links with properties that are worth less than the allowance for IHT?

My understanding is that GWROB is designed to prevent people circumnavigating IHT but I want to make sure i'm 100% before we proceed.

Note - This is not an attempt to avoid any taxes or achieve financial gains. I've offered £40k for the house as that's all that i can afford and it will give my parents each some cash release to get on their own two feet.
Ultimately, in the future, I would be entitled to inherit the home anyway.

Any advice would be greatly appreciated.

Thanks
David
P L
Posted: 03 April 2018 14:00:48(UTC)
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Assuming they both own 50% of the property, as I understand the rules, then the reservation of benefit rules will effectively void one of the transfers for IHT purposes. Although classed as a potentially exempt transfer (of 30K), it will not be exempt after 7 years as the other transfer of 30K could be.

IHT will be assessed on the basis one still owns their 50% of it, even though you now legally own it. Obviously it could be more that the 50K it currently equates to when you receive it as part of a will.

Given the value (without knowing what the other estate assets are) the chances are there will be no IHT to pay on it anyway so it probably doesn't really matter.

However, there are other issues you might also want to consider.

HMRC like to have their cake and eat it, so it will I believe also be classed as being in your estate, so were you to die there is potential for double taxation as your estate could be taxed on it.

Another potential problem which you may/may not have considered is the deprivation of assets legislation. Were they to need long term care in the future the loss of value to their individual estates (due to an under priced sale) could be claimed as a deprivation of assets by the local Council and they could come after you. Normally a sale at arms length (market value) would prevent this. Also if they are young and in good health ie there was no obvious expectation care would ever be needed, it would make a claim unlikely/difficult - but not impossible.

Have you considered stamp duty. Obviously whilst within the normal nil rate band for a primary residence, the second home charge (3%) could apply if you already own a house.

Then there is Capital Gains Tax, again if it's not your primary residence you will be open to CGT on the sale.

Finding a Solicitor willing to do it might be an issue.

Is there a reason you want to have ownership of the whole property (at below market value) rather than part of it (at current market value), particularly if what you are really trying to do is release some equity for them. Exchanging assets of equal value ultimately puts you on much safer ground.

I'm not a qualified financial advisor, so take the above simply as food for thought.


3 users thanked P L for this post.
Tim D on 03/04/2018(UTC), David Matthews on 03/04/2018(UTC), jeffian on 03/04/2018(UTC)
jeffian
Posted: 03 April 2018 14:46:41(UTC)
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Hi David,

Let's start with "..I am aware of gifting rules around IHT and understand that there are GWROB implications however i'm struggling to see how this links with properties that are worth less than the allowance for IHT?"

Currently, your parents can each leave net estates of £325,000 before incurring IHT, so if all their assets including their respective share of the house are less than that, then there is nothing for you to worry about. It would be useful if you could confirm or expand on that situation first as it gets potentially complicated if they are likely to be liable for IHT.

(Edit: I had not seen PL's post above when I posted this. I had actually prepared a similarly long piece but then chopped it as it got more complex and may not be necessary if the estates fall within the IHT exempt band away!)
1 user thanked jeffian for this post.
David Matthews on 04/04/2018(UTC)
David Matthews
Posted: 03 April 2018 15:22:40(UTC)
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jeffian;60060 wrote:
Hi David,

Let's start with "..I am aware of gifting rules around IHT and understand that there are GWROB implications however i'm struggling to see how this links with properties that are worth less than the allowance for IHT?"

Currently, your parents can each leave net estates of £325,000 before incurring IHT, so if all their assets including their respective share of the house are less than that, then there is nothing for you to worry about. It would be useful if you could confirm or expand on that situation first as it gets potentially complicated if they are likely to be liable for IHT.

(Edit: I had not seen PL's post above when I posted this. I had actually prepared a similarly long piece but then chopped it as it got more complex and may not be necessary if the estates fall within the IHT exempt band away!)


Hi,
Thank you for your response.

The estates will certainly be less than the £325k allowance.

My main concern is that i want to buy the house now in order to allow my parents to take some money out of their joint financial interest in the house.

In brief, my mother can't afford to buy the house, but equally, she doesn't want to leave with my younger brother.

I simply wanted to buy the house at a cost that is affordable to me, but at enough of a figure so they would each get about £10k each to get on their feet.

I hope that clears it up a bit.

Thanks
jeffian
Posted: 03 April 2018 15:59:39(UTC)
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"The estates will certainly be less than the £325k allowance."

Then you have no concerns about the issues of GWROB/IHT raised by your original post. Do, however, consider the other points raised by PL above.
1 user thanked jeffian for this post.
David Matthews on 04/04/2018(UTC)
Alan Selwood
Posted: 03 April 2018 17:04:51(UTC)
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This question raises a lot of issues in my mind.

If you buy the house for less than market value, as a 'connected person' (because you are a close relative), they are for tax purposes making a gift to you of the difference between the market value and the price you pay, regardless of affordability.

If your mother lives in the house, but does not pay you a 'commercial rent', she will be treated as still owning the house for IHT purposes (no 7-year clock applies in this situation), despite any sale and gift figures referred to above.

The flagged issue of you buying a property when you already own one, re 3% stamp duty rates. You would need to check on whether stamp duty would be based on the market value or the actual money changing hands in this artificial, non-arm's length sale, and whether the market value of the house falls within an exempt band. (Do you pay 0% + 3% surcharge, for example?)

There may a different result ultimately whether your parents separate or divorce. They should take legal advice on the implications for this proposed sale and on ultimate liability to IHT if they divorce or separate.

Although there may not be estates exceeding the IHT threshold at the moment, what about if later, but within 7 years, your father acquires a very large sum ( lottery or pools?) and then dies? His half of the house value might then take him into IHT in his own right.
If this was your mother, and she acquired this large extra sum, her half of the house would be aggregated with her estate (no 7-year clock on the house, since she reserves benefit by living in it without paying you a commercial level of rent). This might push her estate at any time in the future above the nil-rate band.
Yes, I know it's probably not going to happen, but it's best to think through all the 'What Ifs'!

These are just some of my thoughts as a non-expert, and I strongly advise you to talk through the implications with a suitably-experienced solicitor (and they would probably need to be of the calibre of those that advise in the FT Saturday financial letters page in the Money section).
1 user thanked Alan Selwood for this post.
David Matthews on 04/04/2018(UTC)
David Matthews
Posted: 04 April 2018 07:12:01(UTC)
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Thank you to all of your helpful comments and information given.
Much appreciated.
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