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bigduckontax
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 4069
Experience:  FCCA FCMA CGMA ACIS
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My parents are in their 60's and were considering equity

Customer Question

Hi : my parents are in their 60's and were considering equity release. I am a main UK resident and am considering buying their home off them for cash - (I advanced them £40k in advance to them from the intended current market purchase price so they could pay off their mortgage. However, intention was for them to live in it rent free, for them to live in until both parties deceased. Is this possible and what is the most cost effective route for them and myself. Should they pay a nominal £4K rent per annum or can they live in it rent free?! Thxs
Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.
Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question. Equity release through commercial channels can result in release of rather less than might be expected! If you buy their home for tax there are no tax problems except that it will be classed as a second home for you, higher rates of Stamp Duty Land Tax (SDLT) will apply and on ultimate disposal any gain will be subject to Capital Gains Tax (CGT).. They will be entitled to Private Residence Relief (PRR) and although any gain they make on disposal is liable to CGT, PRR relieves such gains at 100%. If they give you their home then different rules apply. Such a gift would be a Gift with Reservation. Although the UK has no gifts tax regime gifts can spill over into Inheritance Tax (IHT). Gifts create a Potentially Exempt Transfer (PET) in the donors IHT position. PETs run off over seven years at a taper and in the event of decease within this period are added back to the donors estate for IHT purposes. PRTs are the first to suffer IHT and if the estate is insufficient to meet the tax then it cascades down to the beneficiary for immediate payment. Where a Gift with Reservation is involved the seven year rule does not begin to run until the donor vacates the premises. From your point of view taking a nominal rental would subject you to Income Tax on the sum involved, but would enable you to offset the gain on ultimate sale with Lettings Relief (LR) in addition to your Annual Exempt Amount (AEA), currently 11.1K. Your proposal is perfectly feasible. I do hope that my reply has been of assistance.
Expert:  bigduckontax replied 1 year ago.
This question has re=appeared on my listing with no follow up. This post is merely to clear my listing.