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bigduckontax, Accountant
Category: Tax
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We want our son to have an investment in our house when he

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We want our son to have an investment in our house when he marries in april. The house is worth just under 500K. we wondered about an equity mortgage but this appears to require to have a part mortgage also which we neither need or want. We could sell him the whole house for say 200k and draw up a document that states that we hold a 60% interest in the property on resale or to our estate on our joint deaths the 4 sons receiving 25% of the figure. Is this possible,is it legal RE stamp duty(possible seen as evasion )would a simple self generated agreement signed by all parties and independently witnessed be recognised in law? Thank you
Hello, I am Keith, one of the experts on Just Answer, and happy to help you with your question.
Remember Benjamin Franklin's dictum that in life there are but two certainties, death and taxes. Whichever way this particular cat jumps there will be a latent tax possibility. I have assumed that this house is your sole or main domestic residence and thus any gain is protected by Private Residence Relief (PRR).
By giving him a share in your house you are making a disposal which attracts Capital Gains Tax (CGT), but PRR will relieve any gain at 100%.
Although the UK has no gift tax regime, a gift does have consequences. Thank you lucky stars you do not live in France where gift tax kicks in at 5K Euros! By making a gift you create a Potentially Exempt Transfer (PET) in your Inheritance Tax (IHT) affairs. PETs run off at a taper over seven years and in the event of a death within that period are added back to the estate for IHT purposes. PETs are the first to suffer IHT and if the deceased's estate is insufficient to meet the IHT on the PET then it cascades down to the beneficiary for immediate payment. But soft, there is a further problem. If you continue to reside in the property this is a Gift with Reservation and the seven year rule does not start to run until your vacation. IHT kicks in at 325K and is at 40% flat rate. However under 2015 rules where a residence is gifted or bequeathed to children then the 325K will be extended in stages to 1 million from 2017 through to 2020.
I would suggest that this is not a matter for self generated agreements. You should approach a trusted, local solicitor for a proper document to be drawn up and executed and appropriate conveyances made. Your son will be liable for any Stamp Duty Land Tax (SDLT) payable as SDLT is the responsibility of the party which acquires the landed property not the vendor.
I do hope that I have shown you some of the pitfalls in your proposals.
Customer: replied 2 years ago.
Thank you. My question is more whether the concept is workable. ie We sell the house for 200K (market value Approx 480K) as this is a reachable mortgage figure for my son. We agree that we hold a percentage interest in the property to be realised on future sale or added to the estate on our deaths to be shared between son and siblings.This is primarily to enable some release of capital and promote a community lifestyle rather than a dodge of stamp duty and IHT. An equity buy in may be another option but seems more complicated and may require us having a part mortgage which we do not need or want. Your thoughts ?
Your proposal is feasible and if you do not remain in occupation as you now seem to indicate then the seven year rule will run from the date of gift and make the situation more manageable. Equity buy ins are an unnecessary complication.
Customer: replied 2 years ago.
Ok thanks,to be clear,we intend to stay in occupation with are son and wife. You could argue that we are loaning the balance of the value of the house rather than a gift or that we are retaining a financial interest in the property to be legally secured.How does that stack up?
It does not, as my old boss was wont to say, alter the price of cheese. It will still constitute a disposal and PRR apply or it would be a gift with reservation.
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Thank you for your support.