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IHT and Residence Nil Rate Band questions. I would like to

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IHT and Residence Nil Rate Band questions.
I would like to clarify my understanding of this new rule that comes into force from April 2017. My parents own a portfolio of BTL properties which exceed the current joint IHT threshold of £650k (£325k per person). They do not currently own their own main residence as they previously gifted their house to myself and my siblings which has now passed the PET period.
1. From April 2017, is it correct that if they do not own their own residence, they will only still have the current couple’s IHT allowance of £650k so will not be able to include the additional £100k RNRB per person from 2017?
So in their current situation, by April 2017 their IHT relief would remain at £325k per person and they could not use the additional RNRB if they do now own their main residence?
2. In order to benefit fully from the RNRB from 2017, would they need to own their own home to the minimum cash equity value of £200k (£350k by 2020)? Would they then still be able to use the £650k joint IHT allowance to cover their BTL portfolio and remaining assets?
3. By 2020, if they own their own home and have a BTL portfolio, will they be able to use the full £1M allowance to cover their whole estate including main residence, BTL portfolio and all other assets (subject to the main residence having a cash value of a minimum of £350k to fully use up the RNRB, and then the remaining allowance of £650k being spread across their remaining assets)? Is this correct?
So for example, if they buy a house as main residence which has a value of £600k but their mortgage is £200k, the cash value is £400k (£50k over the joint RNRB of £350k). Would they be able to use the remaining £650k allowance to cover that £50k which leaves £600k to cover all other assets?
If the above is correct, if they remortgage rather than sell some of their BTL properties to raise the equity to purchase a main residence: Would this save the CGT (applicable if they sold now), but also, if their total assets are less than £1M by 2020, would this mean that there would NOT be any IHT liabilities or other tax liabilities when they both die and the properties are transferred to their children? I say this based on if they remortgage their BTLs and therefore have a higher % of mortgage remaining on the BTL properties which would reduce the equity in each property).

Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question.

1. Correct.

2. Here is the guidance from Clarke Willmott:

'In brief, these are that your estate contains an interest in a dwelling house which you have at some point occupied (“a qualifying residential interest”), and that that qualifying residential interest is inherited (by Will, on intestacy, or otherwise) by a lineal descendant. Unlike the general nil rate band, the RNRB is dependent on the identity of the beneficiary who inherits the property; this is a concept that is unusual in modern UK succession tax, where, aside from the surviving spouse exemption, the relationship of the recipient of the gift to the deceased person is usually irrelevant. Entitlement to the allowance is also reduced once the value of an estate exceeds £2 million, becoming worthless once an estate exceeds £2.35 million when the allowance is fully in force (assuming the deceased cannot carry forward any allowance from a previously deceased spouse or civil partner).'

3. The 1m exemption from 2020 is only available where the residence is bequeathed to children.

Yes they would be able to use the balance against other assets.

There would be no CGT on remortgaging of the BTL properties.

Your scenario is possible, but there must be sufficient cash available to meet the mortgage payments.

Customer: replied 1 year ago.

Thank you.

1. If they sell to raise finance to purchase a residence, this will create a CGT 18% charge (basic rate tax payers) immediately?

2. If they transfer the properties now to the children, will there be CGT, BTL SDLT and a PET (so 7 years need to pass)?

2. If they remortgage now to raise the finance, if they both survive past 2020, on both deaths, how do the properties transfer to their children if there are mortgages on them?

a)Do the children need to apply for the mortgages to take ownership?

b)Are there any other taxes that would be applicable if the total assests are below £1M?

c)If no other taxes are due, it seems by remortgaging they would save paying CGT now?

Thank you.

1. Yes, and depending on the income plus gain in the year of sale could push them into the 28% CGT bracket.

2. Correct.

3. Unless the mortgage company is prepared to transfer the mortgage then they will have to be paid off, presumably by the children taking a mortgage from another source. I can see no other tax liability, there is enough already! If they do not dispose then there is no CGT until sale at some future, indeterminate date.

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Customer: replied 1 year ago.

Thank you.

Please can you clarify a few things you mentioned:

1. You mentioned possible 28% CGT if the income plus gain pushes them higher. How would their income increase as a result of the sale to push them into this bracket?

2. If the children wish to sell the properties rather than take over the mortgages upon their deaths, would we be able to sell them if the properties are still in the name of the deceased (is this during probate)?

Would this a generate CGT liability but who to, the estate or the children?

3. After inheriting the properties and say in the future after a year or two the children decide to sell the properties, how would CGT be calculated - is it based on the price at the time of inheritance rather than when the properties were originally purchased by my parents years ago?

1. The rate at which CGT is levied depends upon the gain made and other income of the taxpayer in the same year. This can push the rate into the 28% bracket for a portion of the gain.

2. That course of action would be open to the executors. It would require a variation of the will to which all beneficiaries would have to consent. There is no CGT on death, all assets being aggregated and exposed to Inheritance Tax (IHT) so whilst the estate was still under the executors/administrators CGT would not apply.

3. Acquisition price for CGT would be the probate value.

Customer: replied 1 year ago.

Thank you.

1. Can I clarify my understanding on point 2 - if during probate the children chose to sell some of the BTL properties rather than take the mortgages on, there definitely would not be any CGT created through the sale for both the estate or the children? Only IHT? But if the estate is below £1M, there would be nothing to pay at all, even on a sale?

2. I asked a question yesterday about if my parents gifted one of the BTL properties to their children (so if they pay off the mortgage first and then transfer to us mortgage-free). Please can you clarify if this would create a CGT liability for them in addition to a PET or would it just a PET.

Also, would the children need to pay SDLT on the transfer if it was gifted?

Thank you again for your help.

1. Correct, this is done by varying the will, a Deed of family Arrangement is required, but all beneficiaries must consent to such a Deed.

2. For your parents it would constitute a disposal and thus attract CGT on any gain made between the acquisition price and the market value as at the date of gift.

As for SDLT, here is the guidance from the Gov UK site on the subject:

'If the transfer is a gift

If the transfer is a gift and there’s no consideration, SDLT doesn’t normally apply.'

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Customer: replied 1 year ago.

Thank you, ***** ***** 2 more questions and that's it!

1. If during probate the children decide to sell the properties but there is an IHT liability on the estate, does the entire IHT amount need to be paid in full before the properties can be sold?

2. If they do not redeem the mortgage and transfer the property to us with a mortgage that we need to apply for, is this still deemed a gift or would it be deemed a sale (in terms of SDLT)?

1. It is all in the hands of the personal representatives, but any IHT liability would have to be settled before any changes or other distributions are made.

2. It is not a gift if it is a probate disposal. Gov UK web site again:

'If you’re left land or property in a will

If you get land or property under the terms of a will, there’s no need to tell HMRC and you won’t pay SDLT. This applies even if you take on an outstanding mortgage on the property on the date the person died. This is on condition that no other consideration is given.'

Customer: replied 1 year ago.

Sorry, question 2 is referring to my parents transferring the properties now, not when they are deceased.

Please can you clarify that.

Thank you.

This is what I told you:

If the transfer is a gift

If the transfer is a gift and there’s no consideration, SDLT doesn’t normally apply

Customer: replied 1 year ago.

I wanted to clarify because I was confused from your answer today which seems different to the answer in my question yesterday about SDLT on this situation, you advised...

'All these proposals constitute disposals for CGT purposes. The SDLT position depends upon the buyers status, if for them they are second homes then the 3% surcharge will apply.'

I am sorry, but I am noted for being particularly dense and stupid, but I cannot find the quotation to which you refer in any of my responses.

Customer: replied 1 year ago.

It was a separate I asked yesterday:

'My parents have some rental properties that they wish to transfer to myself and my siblings to reduce their estate value and inheritance tax.

The properties currently have mortgages. If they transfer them, would they be treated as a Sale with CGT to pay? So would myself and my siblings have to pay Stamp Duty and if so, would it be based on the rate of BTL stamp duty?

If my parents redeem one of the mortgages and own the property outright and transfer to us, would it still be classed as a sale with CGT and stamp duty?

If they do pay off the mortgage and transfer, how would the transfer be treated in terms of IHT in the future (would this come out of their estate immediately or is there the 7 year rule or any other time factors)?'

Then you must follow up on that thread not this one. For continuity that is the only appropriate way.

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Thank you for your support.