Inheritance tax/CGT and joint-owned house

Yes, but be aware that unless the children are at present still living in the current house with their mother, they are *already* liabile for CGT in respect of their share of any gain since their father's death.

I don't know to what extent the trust affects things, but certainly in respect of the children they would. While of course it's much likelier that the mother will die before any of the children, you're wise to look into the "what if" scenario should one of the children die first:

If the child dies before the 7 years are up, that child's gift to the mother reverts to the child's estate, and there will be no CGT worries unless the child's estate is (or would become) big enough to exceed the IHT threshold. If the child dies after the 7 years are up, the gift will swell the mother's estate, risking IHT.

Are you sure?

There is an alternative, where the children risk neither IHT nor CGT. Rather than retain a share of the new house, or give their mother the money, they could simply lend her the money. That way, when she dies, they get it back with no possibility of it counting as part of her taxable estate.

You need to carefully read the actual trust document, which is likely to be in impenetrable legalese!. Typically such trusts:

- only apply to the amount below the inheritance tax limit, at the time of death;

- are discretionary (no-one has an absolute right to the property, at least during the lifetime of the spouse);

- give a lifetime interest to the surviving spouse (the right to continue to live in the house and the right to some sort of equivalent benefit if the property is sold);

- include the surviving spouse as a potential beneficiary from the capital.

Normally the trust would buy part of the new property, not the children.

It is likely that balance will have to be invested in a suitable vehicle for trusts. It is possible that the combination of the trust creation (presumably in the will) and any letter of wishes would result in the trustees being obliged to pay the balance to the surviving spouse, if there is no longer any IHT advantage. You really need to read all the documentation carefully and probably need professional advice.

Note that HMRC have a whole manual on taxation of trusts like this. However, unless the trust allows itself to be wound up and paid to the mother, I suspect that the trust would have to become a joint owner of the new property, on a non-50:50 basis. It may well be least hassle to make it the majority owner of the new property.

Who are the trustees? It would probably help if they were a professional organisation, although that probably means significant annual fees.

IANAL. The only purpose of this is to make it clear that this is a complex area, dependent on the exact wording of documents, and probably requiring professional advice.

As noted, if this trust has been properly drafted, the children will never own any of the capital during the mother's lifetime.

If it were theirs to loan, unless she paid them commercial rates of interest on the loan, I suspect she would have an income tax liability for the benefit of the notional interest.

Fairly, yes - property values have fallen since my father's death and the threshold has risen. I think the whole thing was very borderline to begin with.

Hadn't actually thought of this but I've also noted David Woolley's comments re the trust which I will check. Thank you both for your thoughts.

KF

On what basis do you suspect that, may I ask? It doesn't seem quite correct to me.

It would be different if the money had been hers to begin with and she had gifted it to the children only for them then to lend it back to her. In that case she would be retaining a beneficial interest in the money, which would make the gift ineffective for IHT purposes unless she paid them a commercial rate of interest (this is analogous to the situation in which a parent gifts the house to the children but continues to live in it, again the gift would be ineffective unless a commercial rent is paid).

But in the present situation (trust permitting) the money would be absolutely the children's, having never been the mother's (coming as it did out of the father's estate).

In any case, if an income tax liability were to arise at all, it would be upon the children, not the mother, because the interest would be the children's income, if it is in fact paid, while if it is not paid, I'd imagine it would be deemed that it was paid, but then gifted back to the mother. There is no income tax on gifts, it could not count as the mother's income. But it would count as the children's income because they notionally earned it before gifting it back.

It looks like it only applies to loans from employers to employees. strongly hints that loans to members of the family, for family reasons, don't count.

Where the liability arises, for the employee loan case, it is a P11D item, so ends up taxable against the loan recipient.