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Sam
Sam, Accountant
Category: Tax
Satisfied Customers: 13938
Experience:  26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
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Sam Are you able to offer advice on inheritance tax?

Resolved Question:

Hi Sam
Are you able to offer advice on inheritance tax? I didn't see this listed in your profile so just thought to check as my question is regarding inheritance tax rules for a property my parents live in that myself and my siblings now own.
Thanks
Submitted: 2 years ago.
Category: Tax
Expert:  Sam replied 2 years ago.
HI
Yes I can help - whats your question please
Thanks
Sam
Customer: replied 2 years ago.

Hi Sam,

Please can you let me know when you are online so I can send a question directly to you re Inheritance Tax/CGT.

Many thanks,

Mary

Expert:  Sam replied 2 years ago.
Hi Mary I am online now if you are ? It appears you are offline - but all you need to do is type the question and aswe have started the Q and A session between us, it will be left for me to answer it for you ThanksSam
Customer: replied 2 years ago.

Hi Sam,

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?

Thanks,

Mary

Expert:  Sam replied 2 years ago.
Hi Mary I am online and you just type it here through this Q and A process (the private messages are for experts to communicate with each other) Thanks Sam
Customer: replied 2 years ago.

Hi Sam

My question which relates to CGT and inheritance tax;



  • My parents gifted their house to myself and my 2 siblings in 2006 based on the market value at that time of £265,000

  • They paid market value rent as tenants from the time of it being gifted.

  • The property was sold in November 2012 @ £237,500

  • We purchased a new property in November 2012 @ £240,000 which they moved to and carried on paying rent

  • We pay income tax on the rental income each year and have done from 2006

  • The property is now valued at £260,000

  • My parents are now wanting to purchase the property back off us and want to know if there are any implications with this.


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?

Many thanks,

Mary

Expert:  Sam replied 2 years ago.
Hi Thanks for your question You should have declared the cap[ital loss 2012 as you sold for less than the market value at the time the property was gifted. (as a difference of £27500 plus disposal costs such as estate agent and legal fees and any capital improvements) And by 2013 as your parents had paid market rent from 2006 to the sale in 2012 there would be no pre owned asset tax and the property could be treated as a potentially exempt gift. And b y the 7 year date (even though by then the property was disposed of) - no longer had to be included for Inheritance tax purposes. This means withe the new purchase was was then bought in all 3 of the childrens' names for your parents there is no need for them to pay market value rent for pre owned asset tax or Inheritance tax purposes. So this is an option rather than complicating matters by the fact they want to buy the property back from you as this makes a mockery of the previous 9 years ..... but in honesty as long as they buy it at full market value, then there is not going to be any tax implication - aside from the fact this then has to be included back into their estate - where as you have got it excluded -The IHT threshold is £325,000 each but will increase to £500,000 each from 6 April 2017 so the properties (with both their IHT exemptions) have always been under the IHT threshold so this is not anything new.In my opinion this is a fruitless exercise as they are now living in a property that you three children own (as a new purchase) and they do not need to pay any rent at all! Let me know if I can be of any further assistance. ThanksSam If you sell back to them you three will have a share of capital gains - as the property has increased in value by £20,000 but this does then mean you only have £6666 each to consider and as you have a loss from the original sold property - and also have an annual exemption allowance of £11,100 then there will be no actual capital gains tax to consider. -
Customer: replied 2 years ago.

Thanks Sam,

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,

Mary

Expert:  Sam replied 2 years ago.
Hi Thats great that you declared the losses to HMRC back in 2012 I disagree with the advise you received - as once the original property -(which was gifted and needed to still be considered within the 7 year period ) was disposed of - then any further purchase UNLESS then bought in your parents name would not have any Inheritance tax implications. Only the original property would have remained relevant - as this was the asset gifted, anything property/asset thereafter had to be considered in its own merits. And as in you and your siblings name was not a gifted property. 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.So - in this new property which was bought by you and your siblings - so owned by you and lived in by your parents - rentsa re not needed to be paid. You now make mention of buy to let properties ?? THis may need to be listed as a new question =- or I can offer additional Q & A time - let me know how you would like to proceed Thanks Sam
Customer: replied 2 years ago.

Hi Sam,

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.

Thanks,

Mary

Expert:  Sam replied 2 years ago.
Hi Mary Thanks for your furtehr question The IHT potentially exempt rule allows after 7 years for a gift to be disreagrded for Inheritance tax purposes. So no, rents would not have been due on the new property for a further year on the basis that you sold the original gifted property less than 7 years after the it had been gifted.The rents ceased when the property was sold which was 6 years after it was gifted but the value of the property remained a consideration for a further year after it was sold for IHT purpsoes on your parents estate so that the full 7 years were considered against their estate. Now we have four positions to reflect on1) The original property is no longer considered for Inheritance tax as more than 7 years have lapsed since that was gifted to you and your siblings (so there was just Capital gains on you and your siblings at the time of sale which has been dealt with) 2) The rents on the gifted property ceased once that original gifted property was sold but HAD to be collected to ensure that this gifted property could be treated as a potentially exempt property - or it would have been treated as a reservation with benefit - so remaining as part of your parents estate AND there would have been an annual pre owned asset tax to pay. 3) A new property has been purchased, which has NO IHT consequence on your parents estate at all as bought by you siblings and you allow your parents to live in it (so its not originally their home/property but a purchase made by you and your siblings on which you have permitted them to live) But this affects you and your siblings estates (third share each) and also a capital gain position to consider should this property be sold or transferred4) Rents that you collected - which have not been needed to exempt the property from your parents estate as this property was owned only ever by you and your siblings, so there was no IHT consequence or pre owned asset consequence. So the rents served no additional purposes to secure this IHT position. The new purchase has NOTHING to do with your parents estate - you only had to continue to consider about the initial value of the original property until such time the 7 year period had passed - even though sold before that 7 year window had lapsed. Let me know if you need me to expand further. ThanksSam
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Customer: replied 2 years ago.

Hi Sam,

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?

Many thanks,

Mary

Expert:  Sam replied 2 years ago.
Hi Thanks for your follow up questions You must bear in mind at this stage its all draft legislation so the full logistics have not been finalsed However - the new rates which come into affect from 06/04/2016 sees an increase from £325,000 to £500,000 per individual is so that the additional £175,000 can be utilsied against a family home that is passed onto direct family (si you and your siblings for example) IF there is no home (as in this instance) or there were no direct family (so no offspring just siblings or neices and nephews) then the £175,000 would be lost So in your parents case, as matters stand, if the property is NOT transferred into their name then they remin having just £325,000 threshold each. So yes, if they keep the arrangements you have and do NOT buy the property (they would not be buying it back as this new property was never theirs in the first place) then yes they only have the £325K threshold for Inheritance tax. As the property is exempt from their estate anyway (as the original gift has been sold and you and your siblings bought the latter property) - I have no idea why the accountant is making a thing of it! He would benefit from fees to action this - you and your siblings would have a capital gain, and your parents should they need care in the future may have to use the value of the property to facilitate all or some of that cost. Your family made a very sensible declension in 2006 - on a property that was gifted, and they paid rent on. This ensured for both IHT and pre owned asset tax purposes, they secured their own position - and after 7 years the value of that property - was disregarded for IHT (even though the sale took pace the year before) This new purchase was made by the siblings (using the sale money from the gifted property) but has NO affect on your parents, and their is no need for them to pay rent - as its exempt for pre owned asset and IHT anyway. I am a fully qualified accountant, and have been practicing for the last 7 years and worked for HMRC for 26 years prior to that - of which IHT , gifts and capital gains and property was part of my day to day remit - I hope that reassures your parents - but I am concerned their own accountant is not offering exact and accurate advise Thanks Sam
Customer: replied 2 years ago.

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.

Many thanks,

Mary

Expert:  Sam replied 2 years ago.

Hi

 

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!)

 

Thanks

 

Sam