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bigduckontax, Accountant
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my husband and I bought a bungalow in March 2013 part finance

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my husband and I bought a bungalow in March 2013 part finance by savings, part by a mortgage on another property and part by a loan from my parents.

As my mother knees started to fail we said that she could stay in the bungalow until we sold our own property.

However, she did not want to move out so we had to buy and alternative property when we sold our property in the summer of 2013.

My mother wants the property in her name now. Bearing in mind my parents are 80 and 82, they do not wish to pay stamp duty. If we 'gifted' the property to them what would be our liability should they die within the next 7 years.

I have been told that we would have to pay 40% of the then value of the property in tax.

Can you advise if this is correct or is there an easier way to solve this dilemma?

Many thanks
Kathryn Dudding
Submitted: 3 years ago.
Category: Tax
Expert:  bigduckontax replied 3 years ago.
Hello Kathryn, I'm Keith and happy to help you with your question.

You gift the property to them and thus it becomes part of their estate which will be liable to Inheritance Tax (IT) on their death in due course. I need not go into the ins and outs of this at this stage. The gift by you, however, creates a Potentially Exempt Transfer (PET) in your tax affairs. PETs run off over 7 years and there is a taper. However in the event of your demise within this period the value of the property transferred would be added back to your estate and be liable to IT. If your estate is insufficient to meet the PET it cascades to the recipient for immediate settlement. The solution is, of course, a decreasing term life insurance policy to protect the position.

Stamp duty is payable on the consideration in the transfer deed. If you give it away there is no SDLT payable. Just for information the rates are Nil up to 125K, 1% up to 250K, 3$ up to 50K, 4% up to the million.
Expert:  Sam replied 3 years ago.
HiSorry to intervene but another position to consider is Capital gains, if there has been an increase in value of the property between the original date of purchase and the value should you proceed with this. I would hate you to have an extra burden, especially an unexpected one, could you advise whether there has been an increase in value - and what % of the property do your approximate to own at this time?ThanksSam
Customer: replied 3 years ago.

We only purchased the property in March 2013 as we intended to live in it ourselves. Therefore, at the moment there has been no increase in value.


 


If both of us were deceased in 5 years time from the answers to date I assume that any increase in value (in addition to the initial price paid) would be liable to tax regarding our estate. Can you confirm if I have understood this correctly?


 


We have 2 sons who would inherit our estate which currently includes 3 let properties, the home we live in and the bungalow we plan to gift to my parents. Total value £800,000.

Expert:  bigduckontax replied 3 years ago.
On death the whole ball game changes. I have explained the position of PETs earlier, but as you have yet to make this gift and indeed may never do so I have ignored that element. On death your estate is all added up for probate at current market values and that includes all your possessions. Acquisition prices are an irrelevance. These are then liable to Inheritance Tax (IT), a flat tax of 40%. At present there is an exemption of the first 325K for each of you and as inter spouse transfers don't count at all let us suppose one dies then the other. I have assumed that there are mirror wills between you moving the property of one on death to the other and the bequests to the sons kicking in thereafter. That would be the norm and if this is not the case I would suggest that you urgently seek the advice of s trusted local solicitor to put your wills in order for tax planning purposes.

Here is the reason. If one spouse dies their possessions pass to the remaining spouse free of tax. So does the deceased's IT free allowance of 325K. Thus on the final death and the ultimate bequest to the sons there will be 650K exemption available leaving considerably less for the tax man to get his shovel into!

I do hope I have been able to throw some light on the IT position on passing. Many people don't think about it until it is too late and then nothing can be done. Fortunately you seem to be aware of possible pitfalls in time to do something about it. Please go and see your solicitor.
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Expert:  bigduckontax replied 3 years ago.
Thank you for your support.

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