Please can you let me know when you are online so I can send a question directly to you re Inheritance Tax/CGT.
Thanks for your reply. Should I send it to you via clicking on your profile rather than entering it here? I want to make sure you are credited for it so should it be sent as a brand new question? When I click on your profile it is showing that you are offline?
My question which relates to CGT and inheritance tax;
The main reason my parents want to do this is because they are quite happy in this house and as the market value rent has increased quite a lot over the last few years, they do not want to continue paying rent. They also think that the house would be exempt from inheritance tax now with the changes to the threshold to £500k per person (is it 2017? I’m not totally familiar on the IHT thresholds and how it stands now).
They also feel it is better for them to remortgage one of their buy to let properties to release equity to fund the purchase. This would reduce their overall CGT liability when selling their buy to let property and their own home would also be exempt from IHT.
Please can you advise if what they plan to do is ok and if there are any other financial/tax implications from CGT/IHT or anything else.
I know that for myself and my siblings, there potentially is CGT but as the difference is only £20k profit split between 3, our personal allowance will cover that.
Is there anything else that we or my parents need to consider?
We did declare the losses in 2012 when the house was sold.
They carried on paying rent as we were told by my father's accountant that they had to keep paying rent for the rest of the lifetime they carried on living in the property regardless if we sold it and bought another property or regardless of the 7 years because it all related back to the original gifting of the house!!
It seems from what you have said that they have been paying rent unnecessarily and we have been paying income tax on this!
So to summarise, they no longer have to pay rent after the 7 years has passed? So basically they can carry on living there now without any implications and the house is totally exempt from IHT?
So from your own opinion as an accountant, is there anything else they should or can do to reduce their CGT liability on their BTL properties if they do not use the remortgage funds to buy the property back off us?
Thanks for your reply. I will ask the BTL question separately.
I am just trying to understand what you have said about the rent and the 7 years:
'No its not that 7 years has lapsed that rents are not due its also because the original property cannot be classed as a pre owned asset AND the 7 years have lapsed (so if the original property had been retained rents would still needed to have been paid beyond the 7 years as this would still have been a property that was owned by your parents, that they had gifted that they still were making full use of.'
Does that mean that if we sold the property before the 7 years, rents would still have been due on the new property up to 7 years or would rents have ceased as soon as it was sold even if it was before 7 years (but the property would have still been under IHT until 7 years passed).
Sorry if I sound confused! I just want to be able to explain it to my parents clearly.
I have spoken to my parents about this matter and my father has asked me to clarify with you if the new inheritance tax rules of 2017 that will include £100,00 per person for the 'family home allowance' means that you can only use this part of the new IHT allowance for a family home and no other assets?
So does that mean if they keep the arrangements we have and do not buy the property back, in 2017 they can only benefit from the £325k threshold for IHT so cannot use the additional £100k to offset other assets in their estate because they do not own a family home?
Their accountant has advised them that if they own a main residence, it will be exempt from IHT in 2017 under the new rules if the family home is £200k (2 x £100k) and this will increase each year thereafter.
So based on this advice, their plan was to remortgage one of their BTL properties and use the funds to either:
-buy another property to live in as their main residence in order to benefit from the new rules
-or buy back the house they are currently renting from us for the same reason.
This is why they want to buy back the property or purchase another property to live in as their main residence so they can benefit from the new rules. If however the increased £100k IHT allowance in 2017 can be used for other assets, not just a family home, then they will keep the current arrangements.
They didn't realise by buying another house or buying back this house that it would fall back into their estate for IHT as their accountant did not explain it to them.
So based on what you have advised, if their main residence falls back into inclusion for IHT, we need to clarify the 'family home allowance' clause of the new rules and if this can only be used for the main residence and nothing else.
I hope this makes sense?
Hi Sam, thank you very much for clarifying this position.
They have often said they do not always trust their accountant which is why I took to asking you the question! You have always answered my questions clearly and with expert knowledge so that is why I always turn to you for advice!
Just one final thing to clarify regarding this issue...
I think now they understand exactly how the increase to the IHT to £500k works (ie - they can only utilise the full amount of £500k only if they own a family home), they want to consider releasing equity from one of their buy-to-let properties to buy a separate house to live in (not buy back the exisiting property they are renting from us but to buy a different property entirely). They want to do this for the purpose of utilising the full £500k of the IHT exemption as this will reduce their overall capital held in their buy to let property portfolio and will not affect the property that my siblings and I own together (now you have clarified this position).
Aside from the pain of having to move house (which they don't mind doing) and having to sell it to fund long term care, from a financial point of view would you agree this is a good way to be able to fully benefit from the new IHT thresholds?
If you prefer this to be a new question, I am happy to send as a new question to you but can only send it to you when your profile shows you are online.
Yes you have got it in one - they can only have (and then utilise the full £500 if they had a family home) as they do not, they abide by the existing rules £325K limit each.
This question re the buy to let would really need to be either with an acceptance of more Q and A time ( so an additional fee determined by me) or you post a new question but as its connected with the IHT position I will advise -(you can always pay a bonus if you wish)
They could simply move into one of the buy to lets and make it their main residence and as long as the value of that property was less than £250,00 (so £125K each in essence) then they could utlise the family allowance provided re the IHT threshold - but will then always have a capital gain situation arising should they sell prior to passing away - as there had been a time this was not their main residence (but of course should this be their final resting place, so to speak then Capital Gains would not arise as this would then only fall into an IHT consideration)
If they sell the buy to let - then they will lose some of that capital due to capital gains tax, but the new puacshe them would be treated as main residence from the purchase date.
(I shall look into why Just Answer does not show me online - as I clearly am!)