Buying part of parents house?

[kitsilano]

My MIL owns a property that will be just about be subject to inheritance tax when she dies but is getting short of cash. DH is wondering about becoming tenants in common with her - ie buying a portion of her property to provide her with an income over the coming years.

We are thinking this would be better from an inheritance tax point of view than simply loaning her money.

Has anyone done this? Would it work? Any pitfalls?

Can you/he raise that amount in cash? You wouldn't be able to get a mortgage for it. As long as actual cash changes hands its ok from IHT I think, but lea may assess differently if she were ever to need a care home.

Not if he pays market value for the interest.
He should beware CGT on eventual sale.

Thanks for replying. Would CGT need to be paid on the whole amount when we sold or juts the increased value between us buying a part of the property and then selling?

No, you pay CGT on the share of the increase - hence Capital GAINS Tax! You also have an allowance of about £10k each year, so it's his share of the gain once the annual allowance has been deducted, and tax (18% for basic rate tax payer) payable on the rest.

If you and he owned the share between you when you sell you could also take advantage of the allowance....

I think if you buy some of her house, technically she needs to pay you market rent for the part she is using that is 'yours'. You in turn would pay tax on the rent received.

My DM & DF looked to gifting me and my siblings their house when they were getting on a bit, (didn't in the end), but I understand that if they had needed to go into a home that 'gift' would have still been counted as their asset if they had been living in it rent free.

I think the same would be counted if you buy part of the house to avoid IHT (or to avoid payment of care home fees if required).

You need professional advice on this, preferably by someone who us STEP qualified rather than a standard high street solicitor. There are all sorts of traps when trying to mitigate IHT especially when a property is involved. The arrangements you are proposing are likely to fall foul of the Pre Owned Assets Tax rules. Basically an income tax charge payable by MIL annually on the value of the property interest sold. The rules referred to by a previous poster relate to Gifts with Reservation of Benefit which may also be in point. I work in this area and am STEP qualified. PM me if you want more help.