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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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We are in the process of moving house at the moment.

Customer Question

Hi
We are in the process of moving house at the moment. We own our current property and we will be selling it to fund the purchase of our new house.
My mother in law wants to give us 50,000 towards the new house but wants something in writing saying that if we sell the house, we will need need to pay back the money plus any profit the money has made through increased house price.
This is purely to try and avoid inheritance tax later on as it is expected that we will never sell the house.
My questions are as follows:
1) If we draw up a formal legal document effectively saying that my mother in law owns a stake in our house, will we have to pay the higher rate of stamp duty? (as my mother in law owns her own house)
2) Is there anything we can do to avoid inheritance tax in the future? Obviously if she 'gifts' it to us there is the gamble of the 7 years rule.
3) What would be the best way forward in your opinion?
Thank you
Submitted: 6 months ago.
Category: Tax
Expert:  TonyTax replied 6 months ago.

Hi.

Let me take a look at this and I'll get back to you with an answer.

Expert:  TonyTax replied 6 months ago.

Here is my answer.

1 Yes. See section 2.5 here and the government confirmation following the consultation in paragraph 1.15 here.

2 If your mother in law gifts you the £50,000 so that it is not a loan, then the seven year clock will start ticking. After three complete years, the IHT exposure on the gift gradually decreases as you will see here. You will also read, that when somebody dies, their nil-rate band is first used against gifts made in the seven years before death in chronological order so there is a strong possibility that there will be no IHT charge on a gift of £50,000, especilaly if there are no other gifts. You could take out a term assurance policy with reducing cover to protect against an IHT liability on a £50,000 gift.

3 What's right for me would not necessarily be right for you. A gift would be simpler. However, I do wonder how you think having a loan as opposed to a gift will avoid IHT. A loan would probably be repayable on the death of your mother in law unless her death precipiates its write off. However, the loan would be an asset of her estate.

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

Customer: replied 6 months ago.
Thanks for the response.So in essence if we use the money as a gift then there will be no higher rate stamp duty but we may be liable for IHT if (God forbid) my mother in law dies within the 7 year period. Although the rate will taper off after 3 years.If we class the 50k as an investment for her then we will be liable for the higher stamp duty as she already owns her own property?Have I got that right?She also mentioned maybe having a 'deed in trust' drawn up. What is that and how would it effect the IHT later on?
Expert:  TonyTax replied 6 months ago.

Your analysis is correct.

It depends what the deed says as to how IHT is affected. Such a thing can complicate matters.

Customer: replied 6 months ago.
But what is it?
Customer: replied 6 months ago.
I think she wants it to say we will pay the money back if we sell the house
Expert:  TonyTax replied 6 months ago.

In that case, the loan will be an asset of her estate and potentially liable to IHT if it is still in place when she dies.

Expert:  TonyTax replied 6 months ago.

Look here for information on deeds of trust:

http://findlaw.co.uk/law/property/buying_property/deed-of-trust.html

Customer: replied 6 months ago.
Thank you.So would a deed of trust effect the stamp duty issue in any way?
Expert:  TonyTax replied 6 months ago.

If your mother in law has an interest in the property through a deed of trust or not, the SDLT would not be affected. The fact that she has an interest is what is important.

A deed of trust can be written to say anything you want so unless you tell me what the deed of trust will say, I cannot say what effect it will have. If it just secures the loan and your mother in law has no part ownership entitlement, then there would be no extra SDLT to pay.

Expert:  TonyTax replied 6 months ago.

Hi.

I'm just following up to find out if my answer helped or if you have any further questions.

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