Inheritance tax avoidance

[Budgiegirlbob]

My parents own a shop in an expensive area. It will eventually be left to myself and my siblings when they die.

I know under the rules of inheritance tax, they can gift items/money to me and my siblings, and this will become exempt from inheritance tax as long as they survive 7 years.

But can they put the shop into our names? They rent the shop to a tenant, and rely on the income from this to supplement their pensions. Does the fact that they get this income prevent them from gifting the shop? Could my siblings and I receive the rent and gift it back to my parents?

I'm a bit unclear of the legalities, and any advice would be very much appreciated.

OK - I have a high level knowledge of IHT so the first thing I think is that you need expert advice (some complex case law in this area).

It's an investment, as they rent the shop out, so no business reliefs there.

The problem with putting the shop in your name but continuing to receive the income themselves is that this sounds like a gift with reservation of benefit and that removes the benefit if gifting more than 7 years ore-death - instead it is likely to be included in the death estate.

But there are complexities surrounding lease/freehold so as I said you need someone who specialises.

Reading that back, high level knowledge means a general knowledge rather than amazing knowledge

I agree specialist advice there are somethings that you may need to consider about how you and your siblings end up owning it, depending on your situation it can be smarter for commercial property to be held by pensions or such like.

1. - Yes you do need specialist advice.
2. A specialist tax advsior will look at all your parents' assets, not just the shop, to see what steps can be taken to mitigate inheritance tax.
3. If they gift the shop to you there is likely to be an immediate charge to capital gains tax, based on the difference between the value of the shop when they acquired it and its current market value.
4. If they gift the shop and still receive the rental income then the gift will effectively be ignored for IHT purposes at it will constitute a Gift With Reservation of Benefit and so the full value will be included in their estates at death.
5. If they gift it to you now and you sell it after their deaths ( which could be 20 years from now depending on how old they are) then you too will be hit with a charge for capital gains tax rather than receiving the tax-free uplift on death.
6. If they gift it to you and one of you dies/ gets divorced/ is declared bankrupt then the asset will be at the mercy of the deceased estate/former spouse/trustee in bankruptcy.
7. If you receive the rental income you will have to pay tax on it at your marginal rate ( which may be higher than your parents') before you can spend it, whether that includes gifting it back to them or not.
8. There is planning which can be done - eg raising a lifetime mortgage on the property and making a gift of the proceeds with the mortgage being repaid by a sale on death. But this is just one example. A good advisor will explore a multitude of options.
9. Are your parents' net joint assets worth more than £650k ? If not then you don't have an IHT issue anyway.

Lots to think about! Thank you for all your advice, we will look to speak to a tax advisor

Would it be possible to put the shop into the ownership of a company, and then give you and your sister shares in the company while they're still alive.

You'd need expert advice, but that might be one way of doing it.