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bigduckontax, Accountant
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Inheritance Tax Planning - Property Investments

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Hello, I'd like to enquire about Inheritance Tax Planning. My mother is in her 60s, is divorced and widowed and owns her property outright - she is looking to downsize to release the capital to invest in buy to lets in order to get a monthly allowance from the profits. Her property is worth £2 Million - she want to buy a new property that she lives in for £1 Million then get myself (in the UK) and my siblings (both who live overseas) to manage a property portfolio on her behalf. So the investments are 2 fold - 1. Buy a new house my mother lives in and 2. Invest in a property portfolio with a monthly return. In order to minimise IHT would this option work? 1. My mother buys her new house but puts myself and my siblings on the deeds as tenants in common (even though we would not be living in the house with her) - she defines the shares of the house so that she falls under the £325,000 threshold and the remainder of the shares of the house are shared between myself and my siblings. Her share is then split equally in her will? 2. My mother gifts me £1 Million, I then setup a Limited company with me and my siblings as directors which is used to buy properties. I put the £1 Million fund into the company as a directors loan and one of my siblings is paid a dividend on a quarterly / 6 monthly basis. In the meantime my sibling could pay my mother a monthly allowance from his own account overseas? 2a. Alternatively is there a way for my mother to invest in the property investment company which we run and still get a monthly return whilst minimising IHT? Any advice on the best way to manage the 2 investments - the property my mother will live in and the property investment company would be most appreciated.

Hello, I am Keith, one of the experts on Just Answer, and happy to help you with your question.
Firstly let me explain gifts. Any gift creates a Potentially Exempt Transfer (PET) in the donor's Inheritance tax (IHT) account. PETs run off at a taper over seven years and are added back to the estate in the event of the giver's demise. PETs are the first to suffer IHT and if the deceased's estate is insufficient to meet the tax then the liability cascades down to the beneficiary for immediate payment. Furthermore if the gift is a 'gift with reservation,' eg a person gives a house and continues to occupy, then the seven year rule does not run until the reservation ceases unless the full market rental is paid to the new owners. with PETs you have a seven year gamble which can be mitigated by using a reducing term life insurance, but depending on your mother's age premiums could be prohibitive.
On death IHT kicks in on estates over 325K and is at a flat rate of 40% (36% if 10% or more of the bequests are for charitable purposes).
Now we come to a tricky bit. Your question says:
'she want to buy a new property that she lives in for £1 Million then get myself (in the UK) and my siblings (both who live overseas) to manage a property portfolio on her behalf.'
Do you mean for her to live in?
Whichever way you turn with this conundrum you hit Benjamin Franklin's dictum that in life there are but two certainties, death and taxes. The house she intends you to own you will not occupy so on ultimate disposal Capital Gains Tax at 18% or 28% will apply to any gain less the Annual Exempt Amount of 11.1K.
Confused you will be! No doubt you will be back with some follow up questions and I will be delighted to assist. They will all be on this thread so will not cost you more.
I do hope that I have shed some light on the position.
Customer: replied 2 years ago.

Hi Keith,

Thanks for your reply. Let me explain the details of the plan a little further.

So on completion of selling the house my mother will have £2 Million. She intends to split this in 2 - £1 Million to buy a property for her to live in and £1 Million for the children to invest in buy to let properties.

My question is 2 fold -

1. For the property she will live in - as the property will be above the £325,000 threshold for IHT in order to minimise the IHT exposure can we buy this house as tenants in common so my mother's share is 25% for instance and the remaining 75% is split between the children? As this property will be where she lives (myself and my siblings all live in our own main residences) I understand we'll need to pay CGT on the sale but if we can at least minimise the IHT that is a step in the right direction.

2. For the buy to let income - in order to ensure this isn't deemed a gift with reservation of benefit. Can my brother pay my mother a monthly allowance out of his own income (from his job) but also receive dividends from the buy to let properties (possibly on a yearly basis)?

Many thanks for your help!

This will take some time to answer.
I am diabetic and currently cooking dinner. Like Drake with the bowls I will be back later.
1. if you buy 75% of the house from your mother then that 75% of cash used will be in her estate so the total for IHT is not reduced. If she gives you the money for the 75% then a PET is set up for that amount so you are on a seven year gamble. If you buy it with your own money then these conditions will not apply, but as you are aware you would all be be liable to Capital Gains Tax (CGT) on 75% of the gain on ultimate disposal. The rules for overseas owners of residential property changed in April.
2. It will not be a gift with reservation as she is not occupying, but a PET will still kick in and the seven year gamble start.
Please remember that there is no CGT on death, the value of all assets are aggregated together for IHT purposes.
I do hope that I have helped.
Customer: replied 2 years ago.

Hi Keith,

Thank you for answering 2 - I think this is clear now. Unfortunately both options are on the 7 year gamble but with my mother being in her 60s we shall look into whole term life insurance policy to mitigate this risk.

Regarding 1. if there were no exchange of cash - i.e. we are put on the deeds as tenants in common when she purchases her new home by we own a 75% share is this still seen as a PET?

I would suggest that HMRC would most certainly view that as a gift to you and create a PET. Furthermore, as your mother is living there it would be a gift with reservation. Now if she gives you cash and you happen to decide to invest in the house then the gift with reservation does not arise, but a PET will be created and the seven year roulette wheel will start spinning.

Benjamin Franklin was right!

Customer: replied 2 years ago.

Thanks for the reply Keith,

Just to confirm - if my mother gifts me the cash from the sale of her house and I then buy a property which she then lives in rent-free is this not seen as a gift with reservation of benefit?

The gift of cash will create a PET and start the seven year clock. We know all that!
If you then chose to buy a house for her in which to live then that is all well and good, but as it is not your sole or main domestic residence the CGT position kicks in on ultimate sale on your account. The exemption for dependent relatives was written out by Gor***** ***** as a 'middle class perk.'
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Customer: replied 2 years ago.

Many thanks for your advice Keith - though Benjamin Franklin was indeed right this will help make the inevitable taxes a little more bearable!

Benjamin Franklin, an early US President, was none the less a Royalist Agent during the American War of Independence. Talk about getting away with it!
Delighted to have been of assistance.