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bigduckontax, Accountant
Category: Tax
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we are a family of three,a father of 85 years and two unmarried

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we are a family of three,a father of 85 years and two unmarried sons in their fities, who all live together in the family home. We would like to remain living together in this home until and potentially beyond the father's demise. The house is currently worth £850k, and the fathers other assets amount to £350K. We could, however, all move to a bungalow, and then the two sons may each contribute £150K towards a shared ownership of the new property, from an inheritance ten years ago from their mother and grandmother. The mother's allowance has been fully applied. My father can support the family out of his pensions and dividend income, and intends to make a gift to his sons after we have moved. The two sons would probably remain in the bungalow into the foreseeable future.
Which of these two strategies, from the IHT standpoint, is the most free of problematic implications, reliable and tax efficient?
Hello, I am Keith, one of the experts on Just Answer, and happy to help you with your question. I regret that whichever way the IHT cat jumps Benjamin Franklin's dictum that in life there are but two certainties, death and taxes is only too true.
When your Father passes on IHT will kick in at 40% flat rate om his assets over 325K. There will be an IHT bill of the order of:
850K + 350K -325K = 875 @ 40% = 350K IHT due.
From your question you indicate that your Mother's IHT allowance of 325K was used up, however if there is any of that remaining it passes to your father making a theoretical allowance of 650K. Remember inter spousal bequests do not come into the IHT computation. The 325K limit is also inflated by any charitable bequests and if these exceed 10% of the estate then the rate of IHT drops to 36%.
If your father makes a gift, presumably from selling the old residence once the family has moved then a Potentially Exempt Transfer (PET) is created in his estate for IHT purposes. PETs run off at a taper over seven years and are added back to the estate for IHT purposes at the taper value. PETs are the first to suffer IHT and if the deceased's estate is insufficient to meet the IHT then the liability cascades down to the beneficiary for immediate payment.
So there in a nutshell is the position. The gamble here is the gift and PET position and the seven year rule.
I do hope I have enlightened you with this quick canter through IHT. I trust that you received similar advice from your financial advisers.
Customer: replied 3 years ago.

thank you for your advice. sometimes when you make a gift, to avoid reservation of benefit you must pay rent etc. Can you help describe a few practical considerations that will be necessary to prevent reservation of benefit on a gift when the beneficiary remains living with the donor? Paying any of my father's living expenses may fall into this category, I suppose?

You are correct in your assertion that if you make a gift with reservation and your Father remained in the old house then the PET would not start to run until that reservation failed. However, I had assumed that as you were all moving into a bungalow that the old house was to be sold so that no gift with reservation would be created as it would have been had Dad gifted his existing residence to you and remained in residence.
A gift with reservation would not be created if you and your brother owned the bungalow between you and your father merely lived with you; a subtle difference.
Conversely, had he given the pair of you the old house, continued to live there and paid you the market rental for his occupation then the 'gift with reservation' rule would not apply, but you two would be liable for Income Tax on the rental paid.
This gift with reservation rule only effectively operates with landed property, the classic being giving one's house to one's relatives and continuing to reside there rent free.
All these should, of course, be tied up with written tenancy agreements should there be a long term inquiry on the position.
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Customer: replied 3 years ago.

I indeed intended to explain that my fathers house would be sold, and that after we had purchased a bungalow in 3 shares living together, he might make a gift to each of his sons. Is capital and income, than, not an issue for reservation of benefit? IHT trusts seem to suggest this, from what i know of them.

If the house is sold and your Father subsequently make gifts to you these would not constitute gifts with reservation. Such gifts would only kick in if he gifted his existing house to you and continued to live there rent free.
If, however, he gifted his share of the bungalow, remaining in occupation not paying a commercial rental, then that specifically would be a gift with reservation.
No trust is involved in the bungalow; you are merely all Joint Tenants ie you own it equally between you. If you own in different proportions you are Tenants in Common.
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