Inheritance tax / capital gains tax muddle

[Intotheebyss]

Myself and sister are on the deeds to my parents 3 houses (1 in the UK, 2 abroad). My parents added us to the deeds about 20 years ago in order to try to swerve inheritance tax. We’ve since discovered that the UK property (atleast) will be included for IHT purposes on their death, as they have been living in it as their sole residency and haven’t been paying market rent to us. We will also be liable for a fair bit of CGT at point of sale as value likely to have increased by atleast £600k since we were added to the deeds. Both parents are in their mid 70s and are still alive and well.

my question is - if we now remove my sister & I from the deeds and setup a will for both parents (neither have a will currently) - will it undo the CGT liability at this stage? I’ve no idea about the properties abroad so I’ll need to look into that more closely. We’re obviously going to seek legal & tax advice but wanted to ask on here initially. Thank you.

Did they add you to the deeds and stay on themselves, or did they remove themselves ie are you and your sister sole owners are shared wIth them

Not a solicitor. From personal experience.
Deed of gift from you to them so they own it outright again?
Then when you inherit you will only have owned from their date of death.

But at this moment in time, OP and Sis had an asset which was worth £400k (eg) when they got it and is now worth £1m. They still made the gain of £600k even if they now gift the £1m to someone else. If they made the gain, then they have a CGT liability on disposal.

(IANAL either)

An argument you might be able to make is that it wasn’t a true or complete gift, it was a gift with reservations. This would certainly be how IHT would look at it when charging IHT.

Broadly speaking, one or other should be true for tax purposes- if if was a full gift, they should be paying rent, you would pay CGT but it would be outside the estate for
IHT. If it wasn’t a full gift, IHT would be due so there ought to be a corresponding allowance on CGT as it cannot simultaneously be a gift both with and without reservation.

You can't undo the CGT implications, gifting it back to them will be a market value disposal and you will have to pay CGT.

If there are no plans to sell the houses, don't change the ownership now. At least you will get the benefit of CGT uplift on your parents portion when they pass away and not trigger a CGT liability.

Unless of course, you have the money to pay the CGT now and you expect the property values to increase (such that the growth in value between a gift now and your parents passing would be wiped out on death)

I think you'd need to speak to someone to get proper advice but in general, giving something as a gift does not avoid CGT. You're taxed as if you'd sold it for market value.

The most important thing here is that your parents don’t have wills. This will lead to a muddle either way. There’s enough money - book a will appointment with a decent recommended local solicitor urgently, and strongly consider doing LPAs at the same time. The biggest potential muddle I think is if your parents lose their capacity, and for some reason you urgently need to sell any of the assets. Lasting power of attorney will help then too. Good luck

Another option to discuss with an expert is you and your sister moving into the house and the parents moving out. If it is your primary residence for a while, that helps with the CGT. It may even help somewhat if one of you can do it.

On a personal level, appreciate this might not work.

This is what happens when you try and evade the tax you're properly due to pay. You get yourself in a mess.

It is perfectly fine for parents to gift their children cash and assets. It is not evasion. If they survive 7 years from the gift then it is not included in the estate for the purposes of IHT. Those are the rules.

Tax evasion is a crime. Tax planning is not.

In this instance, the gift was made 20
ywats ago. If the parents had paid market rent since, they would have been transferring money to their DDs and income tax would have been payable on it by the DDs, plus the CGT on sale.

As of now, no tax has gone unpaid that should have been paid. So no avoidance or evasion. It’s just going to be some work to figure out what tax is payable and when.

Giving away the house you live in isn't legitimate unless you pay market rent and the recipient pays income tax on the rent they receive.

It is legitimate.

What it doesn’t do - by doing it this way - is reduce tax in the way that was intended. But none of those taxes are due right now - an IHT liability will crystallise on death and a CGT liability will crystallise on disposal.

So at the current moment, no tax has been avoided or evaded.

Thank you all for your comments - it sounds like neither IHT or CGT are avoidable at this stage. Will see if I can get more will convos going but they’ve been reluctant in the past as they seem to think they’ve sorted it all out by adding us onto the house deeds - which obviously isn’t the case if things get more complicated & they need a power of attorney in future

They don’t need a POA in the future, they need one right now! DH and I sorted our wills and POA years ago when we were in our 40’s.

Well, one or the other might be. Please take proper advice, not just from MN.

@Intotheebyss This is what HMRC say in a similar scenario. Removing names from deeds appears to be a “gain” and should be reported. Your parents need a will urgently and better financial advice. Plus do POA. It’s vital.

This

@JustASquareMoreChocolate so are LPA different to wills? My dad doesn’t seem to think he needs a will as it’s a simple process off whoever dies first out of my parents will pass everything to surviving spouse (they’re married) and then once they are both passed away the assets will be split equally between myself and my sister; there isn’t anyone else to consider.

LPA is a power of attorney not a will, it is only used while the person is alive . This means if one person becomes incapable, you can manage their affairs. There is a finance one and a health one. My parents were attorneys for each other, joint with me and my brother.

The person can also put ideas of what they want eg for end of life care into the form.

It is far easier to make a will, even on a simple estate, than to die intestate.

Additionally it seems they have assets overseas? So would definitely want advice on this!

You all need proper advice but no you can’t undo the CGT you and your sister now owe

Dying without a will just adds a whole lot of unnecessary hassle that can easily be avoided at what is already a very stressful time.

If they move into the property as their primary residence for a while then it could be reduced (but not removed as it is a proportion of the time you have owned it)

This isn't correct. If your parents live in England, and the estate is worth over £322k, the estate would be divided between the surviving spouse and children.

And LPAs are completely different from wills.

Your parents really need qualified legal advice to understand what they're doing and plan for the future now.

Age UK has a good summary about why people need a will. Good advice on getting a LPA in place too. They are totally separate. You must try and get better financial management/will/LPA info to your parents as they seems very naive at best.