Mrs X is a pensioner living alone in her own home, on which there is no mortgage. She has accepted an offer to move in with her daughter and son in law, Mr & Mrs Y. Mr & Mrs Y's home will need to be extended to accommodate Mrs X. The extension is to be paid for from the proceeds of the sale of Mrs X's house. There may also be some money left over from Mrs X's house sale after Mr & Mrs Y's house has been extended.
What are the tax implications of this arrangement?
Mrs X is (presumably) making a gift to Mr & Mrs Y of the extension/cost of the extension (amounts to the same thing). In the absence of other gifts, that will sit at the bottom of the IHT calculation, and insofar as it is below the IHT threshold, will take a full 7 years to disappear.
There is no "reservation" on the gift if they all live together and all contribute to the running costs. There can be no CGT implications as all properties are PPRs - Principal Private Residences.
Obviously Mrs X wants to maximise her daughter's inheritance, so what's the best way to deal with any money left over? Should that be gifted along with the extension (in lieu of future running costs) or should it be kept back by Mrs X to put towards running costs as they arise?
There's another way of looking at it. It's conceivable that the "extension" is really what is more commonly referred to as a "granny flat" and so does not form part of the Y household.
The wording "there may be some money left over" suggests that there might not, or might not be much. I would have thought that extending a house to create just one additional bedroom, and perhaps an ensuite bathroom to go with it, would cost relatively little, likely not enough to gobble up the lion's share of the sale proceeds of a whole house or flat. This leads me to suspect that the extension is likely to be more substantial, creating a self-contained flat under the same roof, with its own kitchen, sitting room, etc. It could in principle form a completely separate property, in effect turning Y's presumably detached house into a semi-detached property of which the granny flat would form the other half and could be wholly owned by Mrs X.
In such a case there need not be any gift as such at all, though Mrs X might be minded to leave her semi to the Ys in her will.
Although the wording "to move in with" perhaps contradicts this, there is no reason, even if there are not two separate households, why Mrs X could not end up co-owning the new combined property, perhaps in such proportion as the difference in before and after values bears to the new combined value.
The danger, if the properties really are separate, is that if she gifts her half, then there *would* be reservation, and the granny flat would not be part of the Y's PPR, so *both* IHT and CGT might apply.
From this point of view it is important that even if the granny flat has its own "front" (external) door and is largely self-contained, there should be some internal connection (even if this is a door normally kept locked) which would allow the combined property to be reasonably classified as one household.
It has to be the latter, otherwise the whole thing falls apart. There no other children?
There are oodles of things to consider, and as Ronald has suggested, adding Mrs X on to the deeds is an obvious - and IHT saving - option. It all depends on where you want to end up.
Mrs X will (maybe) have to prove in front of a Psycho-Geriatrician (posh word for someone who charges £180 per 1/4 hour) that she is capable of these decisions before any solicitor will touch this. Mrs X is selling her house and effectively giving the money to you, so she needs to understand what she is doing.
How would that affect Mr & Mrs Y's mortgage, and what would the implications be if, at some time in the future, Mrs X needed residential care? Would it then be a case of selling the property to finance the treatment (as it would be if Mrs X still lived alone)?
Mrs X is planning to sell her house, no-one has objected and no-one has questioned her metal faculties, so that doesn't appear to be an issue.
If we can assume she will live for 7 years then she should keep the excess up to £285k (the threshold for IHT). IF she dies within 7 years then the gift would be added back into the estate and would be subject to IHT. How much will she sell her house for?
Ingenious (as ever) but this over complicates things and misses an opportunity to reduce Mrs X's estate. Splitting the house will incur legal costs and will need Y's mortgagee (if there is one) to agree and they might need a valuer's opinion (more cost). Making X a joint owner (even a mere equitable owner) wont help for IHT either.
I dont think you have anything to worry about. The estate is well below any IHT threshold and CGT doesnt appear to be relevant in the circs you describe. Let her pay for the property extension costs as a gift to Y, and keep the surplus for herself.
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