Inheritance tax and property transfer

[budgiegirl]

My mum owns a shop that has been in the family for years. She currently rents it out and has long term tenants. She relies on the income for this for her day to day living expenses. As things stand at the moment, my sister and myself will eventually inherit this shop in the future.

A relative recently asked her why she hadn't yet put the shop into me and my sisters names, to avoid inheritance tax in the (hopefully far off) future.
But am I correct in thinking that this would not avoid inheritance tax liability, as my mum will still need to receive the rental from the tenants?

Any advice would be gratefully received.

Are you sure your mum won't need to sell the shop in the future to fund her care needs?

Inheritance tax will only be payable over and above £325,000 on sum total
of all assets. However if Dm was married and jointly owned shop etc with
DH and he died his £325,000 allowance would have been transferred to her
so she gets £650000 tax free allowance BTW I am only talking about the
current years allowances. It often changes.
Where is Dm living? Does she own another property?
The main way -there are others but you will need to see an Accountant-
to avoid IHT is to put assets in DC name at least 7 years before DM death
Obviously this is a risk so it is something Dm would need to do
early eg at 70 too risky!!!

Are you sure your mum won't need to sell the shop in the future to fund her care needs?

It's unlikely, as long as she can continue to receive the rental from the tenants, as this plus other income would probably cover future care needs.

Where is Dm living? Does she own another property?

Mum lives in her own house, which she owns outright.

The main way -there are others but you will need to see an Accountant-
to avoid IHT is to put assets in DC name at least 7 years before DM death

Yes, I understand this, but as mum will continue to benefit from the rentals from this asset, can we still avoid the IHT if she does live for another 7 years?

IHT is not paid direct by D m. It is paid out of her estate when she passes
away . Asssuming she has the house and shop when she dies you will need
to go through Probate as it SOUNDS like estate over £325,000 Is it?
IR are pretty quick to take any tax owed by the way.
You will need to see a specialist in Estate Planning if you want to find
an IHT loophole but HMRC are not stupid so it will be very complicated
even if it is possible.
The best way as said before would have been if DM had been married.

Assets can only be transferred between spouses without tax implications.

You would need to check to see if the transfer qualifies for holdover relief or your Mum may be liable to capital gains tax as the disposal is treated as taking place at market value.

Also if the property is in your name the tax liability for the rent fallss to you even if you Mum has the money, so depending on your earnings this could end up being higher rate tax.
You ought to get professional advise on the best way to plan for this.

Thanks, concertplayer. Mum was married, and Dad died a couple of years ago, Mum inherited the shop from Dad. The estate in total will be over the £650000 threshold.

Probably best to go to see an solicitor, as it's clearly complicated matter. I do understand the situation if it was the house that mum was thinking of signing over ( I understand that she can't do this and still live in the property unless she pays rent), but I'm a bit hazier on the legalities of a second property. I think there may be capital gains tax to take into account as well !

Yes CGT is payable when a second property is sold. You can nominate
which is your main home but I think there is a time limit which you have to
do this in.

You need to take advice from an accountant that specialises in IHT in the first instance

Also ignore any issue over main home as this is commercial property not residential so that area of law will not apply.

If there is no mortgage on it she can transfer it into your names without any stamp duty being payable. If there is a mortgage on it then there would be stamp duty which is why a lot of people don't rush to make these transfers.

When our first parent died the second put half the house in our names. That is good for IHT purposes (and same applies to commercial property) but means if the property goes up before the second death then you pay CGT on the difference - it did not go up in ou r case so no CGT. Usually the risk of CGT is less than the risk of IHT and these inter generational transfers are a really good idea and stops the state taking so m uch money. I woudl think your main issue would be how to make sure your mother continues to receive the income she lives on when the property is in your name. Could you not just make her a monthly gift fo a different amount and receive the rent yourselves? See a solicitor about it all. It is awful to think the state takes 40% on death so I am sure you you sibling and your mother all want to do what you can to ensure that does not happen. Howevcer it also depends on trust - if your mother gives you this and then falls on hard times would you help her and secondly it depends on you and your siblings' marriages - if they go then your spouses can claim half the mother's house which is one reason parents often don't put property into chidlren's names as it means the non family member spouse can claim it on divorce or half of it.

It is obviously very wise to put the assets in your two names but there must be no reservation of benefit and probably if you get the rent and then give it to mother that is probably a reservation of benefit so it doesn't work for IHT reasons unless you' d be giving your mother money anyway and it can be worked out some other way which satisfies HMRC.

Watching this thread with interest. So as Dm only owns one residential property in fact as the shop is commercial CGT unlikely to apply At least that is something but if dc already has a home and she inherits DM home then potentially CGT though (sorry to get off the point)
IHT if DC gives Dm £3000 pa -the legal limit for a gift under IHT law

that should be ok shouldn't it? The question is would that be enough
for DM tolive off? Doubt it

I don't get this idea that CGT is unlikely to apply. As lalaloopyhead posted, CGT is payable on a gift as if it were a sale at full market value.

Not only that, but the donor doesn't have the proceeds of sale out of which to pay the tax bill.

Then, to make matters worse, because it is a gift with reservation (she would continue to receive the income from the property) you may still have to pay tax on the death of the donor.

I take the opposite view to user1464518991 - I don't think it's awful the state takes from you after you've died. What would you prefer? The state to take more from you during your lifetime?

(Not having a go at user1464518991 - just stating a different opinion).

Not an expert but agree that it sounds like a gift with reservation if she keeps getting the rent.

Does she personally own the freehold or does she own a company that owns it?

And agree with Collaborate - IHT is part of the overall tax take, if it went down (and the threshold has been made pretty high with the transferable option), another tax would need to go up.

Why is it ok to try and evade inheritance tax?

I tax plan, you tax avoid, he/she tax evades...

OP can take better or worse tax planning steps without it being avoidance or evasion.

You don't need an accountant. A specialist private client solicitor will be able to advise your mum on IHT. Look for one who is a member of STEP. You are right, though, if your mum retains the rent then it will be a "gift with reservation of benefit" and the IHT planning will fail.

It's never okay to evade tax- that's a crime. It's very good to avoid it - it's a moral good. God state is appalling and wasteful and those who put their children first are good people. Tax avoidance not evasion is a moral good.

No it's not a moral good. It's morally dubious at times.