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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15946
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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We are selling two properties (ours and my wife's mothers),

Resolved Question:

We are selling two properties (ours and my wife's mothers), combining the money and buying a property that we will all live in together (house + granny flat). Our house will raise £240k and my wife's mothers is worth £150k. Will we be liable for inheritance tax on the £150k that my wife mother contributes to the purchase ?
Submitted: 3 years ago.
Category: Tax
Expert:  TonyTax replied 3 years ago.
Hi.

Can you tell me whether the new property will be jointly owned between the three of you and, if so, in what shares please.
Customer: replied 3 years ago.

We would ideally want it to be in my and my wives names, (in order to eliminate the need to sell the house to cover care fees in the future ?). However, if this would mean that we have a large tax liability, then we would share the house equally amongst the three of us.

Expert:  TonyTax replied 3 years ago.
Thanks.

Leave this with me while I draft my answer. There is a fair amount to get through so please bear with me.
Customer: replied 3 years ago.

Thanks, ***** ***** forward to your answer. I will pick my e-mails tomorrow. (will also log back on and leave feedback as requested).

Expert:  TonyTax replied 3 years ago.

Hi again.

Take a look at the notes here, here and here.

If the new property is owned by you and your wife, your mother in law will have effectively gifted you £150,000. As your mother in law will be living in a property that she contributed to but will have no share of the ownership, unless she elects for the gift of £150,000 to be treated as a gift with reservation of benefit whereby it remains as part of her estate for Inheritance Tax purposes until she either pays a full market rent for the part of the property she occupies, she moves elsewhere or she dies, she will be subject to the pre-owned asset charge.

The pre-owned asset charge is a charge to income tax on a sum equal to 5% of the annual rental value of the property. This could be apportioned based on the contribution by your mother in law towards the purchase as a percentage of the whole but could also be dependent on whether she has the use of the whole house as opposed to just the granny flat.

Where the amount on which tax would be paid is £5,000 or less, there is no charge. If the taxable sum is £5,001 or more, the whole amount is taxable. As stated above, the way to avoid this charge is to elect for the gift to remain as part of the estate of your mother in law.

Take a look here for some example situations and reasons for and against making an election to treat the gift as a gift with reservation of benefit.

I hope this helps but let me know if you have any further questions.

TonyTax and other Tax Specialists are ready to help you
Customer: replied 3 years ago.
Hi Tony, thanks for your help. I will rate you straight after sending this message, so you can get paid. However I've just got one final question which I will be grateful if you could clarify for me. If we register the house in our three names i.e. we've all got equal shares of say £125,000. What then happens to my mother-in-laws share when she dies and passes it on to my wife in her will. I assume that there will be no inheritance tax to pay because it was below the inheritance tax threshold.?
Shane
Expert:  TonyTax replied 3 years ago.

Thanks for accepting my answer.

If you own the house in equal shares, I'm assuming you will each contribute an identical sum towards the purchase price. If you don't there are gift implications.

When your mother in law dies and leaves her share of the property to your wife, there will only be any IHT to pay if the total value of her estate which will include her one-third share of the house you are about to buy, any other assets she owns and the value of gifts made in the seven years before her passing exceeds £325,000.

If your mother in law is a widow, her executors may be able to claim the unused part of her late husband's IHT nil-rate band if there was any to potentially double her estate's nil-rate band to £650,000 at today's rates. Take a look here for more information on that.

Customer: replied 3 years ago.
Thanks Tony, very grateful for your help. Regards
Shane
Expert:  TonyTax replied 3 years ago.

Thanks.

I have to respond to your post to avid the just answer computer system preventing me from answering other questions. You can ignore any emails asking you to respond and you shouldn't respond to this post by me unless you have a related question. Thanks.