Pooling funds with mother-in-law to buy a house - tax implications?

Shouldn't be, provided your MIL retains the ownership of the proportion of the new property she paid for.

The govt will get only interested if you intend to put the new big house in your names only (not your MIL) as some sort of inheritance tax dodge, or care home fees dodge.

The biggest "catch" may be your assumption that you would ever be permitted to build that additional residence in the garden.

Tony

Andy pointed out that as long as she owns the new property in proportion to her contribution then there is no tax implication. But what if she sells her house and gifts the money to the children who then buy a big house where they all live?

This would avoid inheritance tax if she lives a further 7 years, and would make matters no worse if she died within that time. Is that correct?

Robert

Unfortunately not. If when she gifts the money to the children there is an understanding that they will let her live rent-free in the new big house, then it would be deemed a gift with reservation, so IHT would not be avoided even if she did survive 7 years.

Out of interest, would this avoid any CGT that might otherwise be due or would you get bitten twice?

Tim.

In the scenario being considered, she has already sold her old house (this incurs no CGT assuming the PPR exemption applies), and has gifted the money to the kids. The money cannot incur a capital gain.

Exactly what CGT did you have in mind as being otherwise due?

Sorry, I misread the original scenario - I was thinking there were two houses here.

The scenario I envisaged was:

Mother sells house to children and then gifts the proceeds of the sale to the children but lives in her original house rent free.

As the cash was a gift with reservations there will be IHT on the cash gift. Will there also be CGT on the property or will that transaction also be deemed not to have happened and, effectively, the estate is just the property?

Also, what would the situation be WRT CGT if she had just gifted the house rather than selling it and then gifting the money?

Tim.

If the property was the mother's PPR before she sold it to the children then no CGT can arise on her. When the children eventually sell it, then *they* will of course suffer CGT on the gain which has accrued since it was sold to them, to the extent that it was not their home.

Exactly the same.

CGT is due on disposal. It makes no difference whether the disposal is by gift or by sale, but either way if the house being disposed of carries PRR exemption, then no CGT is due.

Suppose we modify the scenario slightly. Suppose the house was not the mother's PRR, but becomes it after the disposal. For example, she might own a holiday cottage but live in rented accommodation, and she might gift/sell the cottage to the kids but move into it (giving up her existing rented premises). This would incur an immediate CGT bill on the mother, but it would still be a GWR so IHT would not be avoided, so in this case it would have been better not to gift or sell the property at all, but just to let it pass by way of inheritance. This would not avoid IHT, but it would avoid CGT.

Thanks. Makes sense now.

For some reason I was thinking that the gift-with-reservation meant that the effect was that the gift hadn't happened and the gift reverted to the estate. In fact, what actually happens is that the value of the gift at the time the gift was made stays in the estate but any extra gain made as a result of owning the gift after the gift was made stays outside the estate.

So gifts with reservations can (currently) be used to move appreciating assets from 40% IHT to 24% CGT - e.g. a wealthy, youngish retired parent could gift their house to their children but continue to live in it so that future increases in value only incur 18% tax for their children.

Tim.

Yes.

Where did the 24% figure come from?

You can't move "appreciating assets" from 40% to 18%, but only their future appreciation. That's worth something, I suppose, if you expect future gain to be substantial.

By the simple expedient of paying the children a market rent for continuing to live there, the base value can escape tax altogether (after 7 years).

I wonder what happens if you stop paying rent after 7 years? :-)

That's what it used to be after N years. I got it right a few words further on.

Tim.

Oh I see what you mean. That's strictly a misrepresentation (not your fault, it was so misreported in the press too). The *effective* rate became 24% once maximum Taper Relief was incorporated (after 9 or 10 years). But of course the *actual* rate was still 40%, it's just that TR reduced the *taxable value* to 60% before the 40% rate was applied to that reduced value.