Home reversionary scheme

Then when it all goes arse about face a lawyer will make 100 times more than he would have got for doing the job in the first place.

There's nothing illegal about it. If someone wants to take out a mortgage on their house, why shouldn't they? Certainly the kids might be disappointed but it's not their house. The issue in these kind of circumstances is whether IHT is payable when the parents die (it not being their house). Well, unless they were paying a full market rent then it would be (assuming the values are sufficient).

You'll be able to find a lender who will offer what they will call a

Rob Graham

In message , James W. West writes

Yes.

AAARRGGGGGGGGGGGHHHHHHHH,

If you mean a 'reversion' scheme in which the property is sold, either in whole or in part, then avoid them like the plague,

No problem, but if its a loan it would still be the parents house and the lenders could take a mortgage over it. Very efficient for IHT.

To own it jointly might make it still in the parents estate for IHT but could still bugger up the children's CGT if sold at a profit.

I remember that. I thought he was up a gum tree with that theory.

See above

no

Avoid reversions to other companies, but internal family deals are fine.

See above.

Northern rock do one in which you can have some capita at the outset and every month they lend you a bit more. This is more efficient than borrowing a big wodge and putting in the bank and drawing off it. It has all the features I describe above.

That's the one I was addressing too.

--quote

In the above extract I take it the first two occurrences of "their" refer to the family, only the third to the parents. Since the relevant proportion will have never belonged to the parents, but to the family from the outset [actually I think the term "family" may be introducing some confusion into the discussion, as "family" technically includes the parents, but I think the intended meaning was the "family of the parents", and should be presumed to mean the parents' likely heirs], whether the parents pay rent or not is of no relevance here because this is not an IHT issue because there is no way the relevant share of the house could form part of an inheritance.

The point of the IHT market rent rule in the case of property gifted by parents to their children is to establish the genuineness of the gift, to show there are no strings attached, that it is not a gift "with reservation". In what James was proposing, there *is no gift* by the parents, and so there is no need to prove absence of strings.

Ah, I misunderstood. When you said they want to move to a better house, and what if the family paid a proportion of it, I thought you meant the family buy a proportion of the new house, not that the family buy the whole house but only pay a proportion of the price. If you wanted it to happen that way, the parents would need to buy it first, pay full whack, and then do the discounted sale to the family.

In that case, I agree with Rob, that the parents would need to pay proper rent or else have the difference treated as a gift with reservation. E.g. parents buy new house for £100k, you buy it off them at a 60% discount, i.e. for £40k, then the nice man from IR would say that's a gift from parents to you of £60k, and that you really only bought 40% of the house, and they'd have to pay at least 60% of the market rent for the rest of it, the bit they gifted to you, for that gift to be treated as free from reservations.

Presumably, though, there are ways round that, so they could agree to pay you rent, but you never actually chase them for it, but let the debt mount up (you'd even give them interest-free credit) until the grim reaper arrives, at which time you take what you are owed from the estate *before* it is taxed.

In message , Ronald Raygun writes

True and right, But the transactions could take place contemporaneously.

I'm not sure why avoiding IHT is a worry here, by the sounds of things all the figures are likely to be below the thresholds.

But if I'm wrong (which is generally the case these days) I think there could be a way in which the value of the reversion isn't the 'price' paid, but the discounted value of the rental stream over the remaining life expectancy of the parents.

Yep, use a trust.

There is no reason why it could not be done. It's just that the consequences of doing it could be to make the deal, in the IR's eyes, an IHT avoidance device, and to treat the discount as a gift with reservation unless a market rent is charged.

"Ronald Raygun" wrote

Is not the similar deal with the (independent) company, also "in the IR's eyes, an IHT avoidance device" - given that it looks like the parents would essentially be "gifting" the 60% of house to the independent company, as well as selling them the other 40%; surely it doesn't matter that they "aren't family". - What happens if they die within 7 years if they had "sold" in this way to the company?

It could be arranged for the transactions to take place at the same time, but that would not prevent the granting of the discount from being treated as a gift.

True enough, but I plucked £100k out of the air for simplicity, for all we know the house might be worth £345,876.

There, there, don't be so glum, old son. Cheer up, it might never happen. At least not tomorrow, so eat drink and be merry.

"Ronald Raygun" wrote

Does this mean that it is impossible for people to leave a part of their house to anyone "at arm's length"? Eg a charity? (bad example I suppose - do they get tax concessions?) Suppose they *did* bequest part of the house to a commercial enterprise (in their will). Wouldn't that enterprise be liable to IHT on death? And if so, then why no IHT if "gifted" two months before death? There is no consistency here!

So the heirs aren't entitled to make the *same* commercial "bet"!

No it doesn't, but it would be taxed unless it's a charity.

Yes they do. Charitable bequests will generate IHT relief by in effect being disregarded when assessing the taxable estate.

Yes, they would, or more correctly the estate would. Remember in this country it's the whole estate that is taxed, not each individual heir's share.

The rules don't provide for this, since it would be unusual for anyone to make unfettered gifts to a commercial enterprise. Normally a quid pro quo would be expected in return. This is different when the gift or bequest goes to a connected person. So especially when nothing is expected in return, it's difficult subsequently to argue that it wasn't really a gift but a commercial arrangement. With an arm's-length enterprise, it's easier to argue the commercial aspect.

But there's nothing to stop you making the bet with the parents of an acquaintance, and for that acquaintance to make a similar bet with your parents. - Or maybe there is.

Likewise in Morocco. I know of a wealthy businessman (ex-pat) who entered into this type of "annuity" scheme. Unfortunately, for him (and his family), he died of a heart attack within 24 hours, IIRC, of signing the paperwork.

Surely the 'discount' fraction would be a gift and just subject to the seven year rule.

Tim

Can it be a gift if you are getting something (a lease) in return? If so, every tenant would have a rent of zero and would just happen to give the landlord a gift every month ...

Using one of them was not a serious option

Okay- so rather than enter into a scheme which could be seen as suspicious the most likely option seems to be to loan the parents some money. So the children can loan the parents some money to buy the house. What happens now if the children need to borrow that money themselves?

1. The house is bought in the name of the children with the parents having some kind of lifetime lease at no rent. Deeds in the childrens name. Efectively then the parents are gifting the rest of the purchase price. This could cause complications later.
2. The house is bought in the parents name with the children loaning them a proportion of the money. This loan rolls up, with no interest paid. How do the children get that money to lend? Can they borrow it secured on the house if the deeds aren't in their name? What are the other alternatives- an unsecured loan would be substantially more expensive. James

True.

And of course CGT could be avoided entirely if the children move into the house when the parents have gone, and stay there for life. Even if they stayed there only for a short while, then depending on how long the parents lived there, Lettings Relief would go some way to mitigating their CGT bill.