Inheritance Tax Question

Yes, it appears to be a gift with reservation.

Also, unlikely to be effective for avoiding local council care rules, if this was being considered too.

"DP" wrote

Will she be paying you (market) RENT??

And AIUI this method is the worst of both worlds. Generally the property doesn't become yours for IHT but does become yours for CGT.

Don't do it.

Tim

Eh? Surely, for tax purposes, it either is or is not yours. It can't be yours for the purpose of one tax and not for another. IHT trumps CGT, so if IHT is payable, it means the gift is set aside and treated as if it had passed by inheritance, so the heir will only be liable for CGT on gains accruing from date of death, which would be the case anyway even if the house passed by will.

If it was sold before death, then CGT would be payable.

Yes you're right. I was getting confused with the care home rules.

OK I'll try again:

It doesn't work as a way of avoiding having to pay for the parent's care if they have to go into a home,

but it saddles you with a CGT bill which will be (much) bigger than the IHT bill that you have avoided.

Does that sound better?

tim

But how would this interact with the IHT regime? Consider this scenario:

Granny gives her house to son but continues to live in it for 3 years. Then she moves into a care home and son immediately sells. Granny dies 3 years later. Looks like gift with partial reservation but with the reservation ceasing after 3 years. Also because 3+3

I suspected IHT would be as per the consensus, but had not considered CGT. It has changed my mind from being fairly indifferent to the idea to being against it.

Thanks for all the comments.

yes somewhat more complicated than I though.

Oh well, at least we all got to the same conclusion that it isn't worth doing.

Tim

No, if you sell assets before death and make a chargeable gain, you have to pay CGT on the gain, and IHT on whatever money is left.

In this case, it would stop being a gift with reservation as you say, and at that point become a PET. There would be some relief after 3 years, but there is still an IHT bill in addition to the CGT bill.

In message , Ronald Raygun writes

IHT = no gift

CGT = Gift @ market value.= H

Son suffers CGT on tapered profit on (sale price - H) - 7900

Clock starts on PET on market value at time of vacating property = D

Send Flowers price of which = £g(2)

If D NRB then surplus taxed etc., etc.,

Whats that?

Eh?

No.

Logical, but yove forgotten that we are dealing with a government department here.

The final problem is I still seem to be short in the wallet to the sum of g(2).

Hmmmm........................

It was initially a gift with reservation, because granny "forced" son to agree to let her continue to live in "his" house rent free. But the reservation was surrendered after 3 years, because she decided to move out permanently, so at that point it became a proper gift, i.e. one without reservation.

But not in respect of any of the same sums. As you say, he'd pay CGT on the gain but IHT only on the rest.

Suppose we change the scenario by removing the reservation aspect, which unnecessarily complicates matters. Suppose granny gave sonny the house properly outright and either moved out immediately or remained paying him proper rent. Then 3 years later she moves out and he sells. The house was deemed worth £100k at time of gifting, and £150k when he sold it 3 years later.

In this situation he'd pay CGT on £50k (less expenses and taper), and it would be the original value of £100k which would be clawed back into the estate for IHT assessment, less any exemptions due to PET status.

Now let's re-introduce the GWR complication, i.e. granny stays put without paying rent. The taxman, wearing his IHT hat, is basically saying a GWR is not a real gift. Would it not follow, therefore, that it doesn't become a real gift until year 3, and therefore that any gain occurring during those first 3 years is really to granny's name, who enjoys full PRR, so no CGT is payable? Probably not. :-( But if deliberately timed so that the gifting is actually delayed until she moves out, then it would mean, of course, that it would be £150k that would be clawed back into the estate for IHT assessment.

It is really up to granny and sonny to decide at which point in time to formalise the gift. At first sight it appears there is no sense at all in doing it early, though there might be, because to an extent CGT is traded off against IHT: The fact that there are reservations associated with the early gift, means nothing more than that the entitlement to potential exemption is restricted. Apart from that it should be the same as without reservation, i.e. CGT is payable on the gain but IHT only on the original value.

Which option is more beneficial depends on the extent to which son can take advantage of CGT annual exemptions and lower rates, and on the effective rate of IHT taking into account the value of the rest of the estate.