RR and JB: "Beneficial" gift of part a property doesn't affect the mortgage...?

....Oops! A level maths letting me down again. *I* have £100k of spare cash :)

...and...

John Boyle wrote:

This is something I don't understand, and don't seem to be able to Google. I have a wife and adult son "Homey", who lives with us, and an adult son "Romeo", who has left home for good. I am...

1) About to buy 50% of the house I live in and which I already co-own, from my mother's estate, by taking out a mortgage. 2) The house is valued at 400k by the District Valuer, and 200k is the 50% price I am paying. 3) Foxtons value the house at around 900k. +++++ I doubt that R&C would accept a District Valuer figure as representing current open-market value (nor should the estate's trustees for that matter if they're doing their job properly). Knock about 10% off the Foxton's figure for the sort of market valuation you'd get from an Estate Agent's valuation survey - i.e the sort of survey you pay about 250 for.

If you just assume a 400k value and R&C get heavy later, three things could happen:

1). R&C will hammer the estate (via the trustees) for the underpaid inheritance tax on the house. 2). You personally could be looking at a minimum tax charge of 50k-60k plus higher-rate, plus interest. 3). A further hefty tax charge will be billed to your son for his under-valued portion. 'Ouch, thanks Dad'.

The tax bill could run and run. No wonder Gordon's coining it in.

-Neil F.

Agreed.

How? Why? Where etc? There's no CGT or IHT, so what tax are you evisaging?

...and I don't see this one either. There's no tax on gifts and the house is his PPR.

In message , Troy Steadman writes

Does this mean that at the moment you own the house jointly with your mother who is now sadly deceased, and you are buying her share so that you will now own all of the house outright but subject to a mortgage?

!!! Something wrong there then. When did the DV value it and on what basis? The whole house with Vacant Possession?

No, not value its "Equity" = £150k.

No, £400k/2 = £200k. The mortgage is irrelevant.

There is no 'cost' as such. but if you were to die within 7 years then the £200k gift would be added back into your estate.

Yes, but dont do that until the finance act is finalised because Uncle Gordon is proposing to change the taxation of trusts. Also, if you did put the dosh into a trust for your son then if he has an interest in possession in the trust then he would be regarded as his for IHT purposes any way.

No, RR was merely suggesting an informal ownership of the property, i.e. an equitable ownership without it being registered anywhere.

It will affect the mortgagee, you would need to obtain their permission if the mortgage was not going to be repaid.

I'm anxious about the disparity in values here. You would easily find that HMR&C will go for the larger value but that would merely increase the size of the Potentially Exempt Transfer when the 7 year clock is started.

>

Yes, yes, this is the deal with the ice maidens.

Hmm, you'll be lucky. Even your £850 below looks optimistic. :-)

Value £400k, equity £150k.

Probably. You're giving him £200k worth of house and he takes on half the responsibility for repaying the mortgage.

This is where his trustworthiness comes in. You hope. And Romeo.

You hope.

Is Homer getting a raw deal here? He had £425k worth of house minus £125k of mortgage debt, then upon sale this is converted for a brief while into £300k of cash, and then he has to give £200k of it away to Romeo and to tie up the other £100k in your new house.

Q1: Why does Romeo get twice as much as Homer, and in cash? Q2: Why do you get a spare £100k and Homer not? You and he both owned half the house, after all. Like him, you had £425k worth of house minus £125k of debt. Both had £300k equity, converted to cash. Yet he has to give 2/3 of it away and invest the rest.

What £400k? I only see £300k received, 200 by Romeo in cash, and 100 by Homer in new house equity. Likewise on the donation side. You end up with £300k of your own (100 in cash, 200 in equity). Had you not gifted half the old house to Homer prior to sale, you'd have £600k cash prior to buying the new pad.

That discrepancy apart, the plan looks good, i.e. gift him £75k worth of equity and let *him* "earn" half the capital gain instead of you earning all of it. So if you snuff it before the clock strikes seven he's in the clear.

It need not concern the lender if the gift is not recorded in the deeds, but merely notified to HMRC in an informal memorandum. The snag, of course, is that you still remain formally responsible for repaying the whole loan, and Homer is merely honour-bound to reimburse you his half.

If the change of ownership were to be recorded on the deeds, the lender would need to agree to a joint mortgage, with all the income formula rigmarole that would entail.

No. The house is:

1) A grotty house next to a brownfield site, out of place and with an oversized garden; a view expressed by an estate agent appointed by the executors, confirmed by a surveyor, then set in stone by the DV.

2) Prime building land. A comfortable place to live (with granny) while developing up to 5 "social" houses in the grounds, or inflicting any amount of Lawrence LLewlyn-Bevan nonsense on the neighbours.

It is only now that developers have been let loose over it that (2) has seemed a more realistic appraisal than (1).

Thanks.

This then is the link I have been missing. It is "registered" informally with HMRC (as RR suggests in the other thread), and that is sufficient for IHT purposes...?

In message , Troy Steadman writes

Ahh! That explains it. In that case the value has increased substantially AFTER the DV's valuation.

How big is the garden? (It will have a bearing on my answer)

Possibly. bear in mind he is likely referring to Scottish Law.

I know people who claim that it will work, but I have not seen it work in practice. I can not see a legal reason why it wont, but the HMR&C often 'look through' transactions when it suits them.

Music to my ears.

Not *that* big. Around 1/4 acre. Next door is 2/3 the size, but has been bought by a developer - also since the DV's valuation / general developer interest - and the two together might support a street of 12 houses, or better still 24 flats.

Sounds as though it has to be worth a try though. Giving away part of a house you live in to a person who continues to live in it with you is the most painless of gifts.

It's at the high end of expecation that the telphone numbers start appearing. Nor is £850k the highest conceivable - 2/3rds of 24 flats is...£1.2m or more?

It is something we all need to discuss. The idea is to give Romeo a £200k house, but it is impractical to tell someone how to spend a gift of money.

Yes. It's a bit difficult to do the figures when you don;t kow what the figures will be.

That's the plan. Thanks RR and JB for explaining it all.

You should make an appointment to see an ophthalmic specialist at the earliest opportunity. Your eyes appear to be afflicted by a not so rare form of cancer which causes visible discolouration tending to coalesce into the bizarrest of shapes. I can see them from here. They look like... cbhaq fvtaf. Not healthy at all.

So for your first stab you guess the figures. That's no reason to botch up the ratios. Do you *intend* Romeo (and yourself, for that matter) to get the better deal?

Where does Helen fit into all this, and is there a Juliet?

All should emerge equally. This isn't the final divi of course, any inequalities can be sorted out later. Romeo, as a self-sufficient young professional, will never need our help. Homey will always need it, and a mortgage-free, IHT-free house to live in when we pass away will be very opportune.

Helen goes with the flow and doesn't aspire to expensive things. I know better than to trust myself with money. Juliet made Romeo sell his Porsche because it was uncomfortable :)

In message , Troy Steadman writes

Good. The 'permitted area' is Next door is 2/3 the size, but has

Quite!

I can picture you rubbing your hands in glee!

Agreed.

How? Why? Where etc? There's no CGT or IHT, so what tax are you evisaging?

...and I don't see this one either. There's no tax on gifts and the house is his PPR.

+++++++

Just make sure you have the IHT position covered on the initial transfer to you. If R&C decide to 'look into it' and judge that the value was 900k not

400k, your gran's estate could be looking at a big IHT bill. That increased value would then apply to your half share and you would be deemed to have received an asset worth 450k which could have consequences further down the chain. Also, if you're going to gift a high value item (which may be twice as high as you're currently assuming), make sure you avoid buses for the next seven years or take out some cover to balance the possible IHT that Homey could be lumbered with.