Inheritance tax, gifts etc

[Mrspopper]

It’s long. I’m stressed. Thank you for any advice.

DH mum sold her house and moved in with us 6 years ago. She funded a loft extension with bathroom which she lived in for 4 years and then her dementia was too advanced for us to manage and she lived in a care home for two years until she sadly died recently.

DH brother is saying he wants equalisation as we have profited from loft extension

we are just within inheritance tax window as loft was done 6 years ago.

Should the money for loft be counted as a gift or quid pro quo for caring we did?

thank you for kindness but factual replies
so hard seeing my husband so worried

Quid pro quo, end off

It is also not clear whether she would still be entitled to main residence relief as she had sold the home to which that applied to move into the house with the loft conversion.
Not helpful to OP - but the moral is to get legal advice in advance of these kind of transactions.

if brother had helped with care I would understand his position a bit more. He didn’t and left it all to OP, however, he now wants money. I don’t see his point, only his greed.

if her will didn’t specify that the loft money was to come off your share, then brother hasn’t got a leg to stand on. The only reason to equalise would be to retain a relationship with him, but it sounds like he’s already well and truly burned that bridge anyway.

It would be worth calculating the market value of DM living with you rent free for the years she did so - as even if brother was right (which he isn’t), that would have to be factored in.

Unfortunately, if he is litigious (as it appears), he may sue anyway on this, in which case you’d have to pay legal costs to defend it. Even if you win, you only get a proportion of those costs back. So if he does go that route it may be worth making a settlement offer to pay him something, just to stop the legal costs spiralling.

We’re about to do this. We’ve used about £10k of mum’s money to put in a Styron she can use (had to be a wet room, she’s too shaky to get into a normal shower) and plater/wire a room for her. The other option is a carehome at this stage, which would be £1k a week, so after ten weeks the room will have “paid for itself” and we will be saving money imo.

Id think about seeing a solicitor.

If your home insurance includes a free legal helpline (almost all of them do) give them a call for advice.

How much did the lift conversion cost?

I agree. This will likely be the less expensive and stressful option. The relationship with the brother is already crap, best to draw a line under that now as well and move on.

If he’s already taken you to court, he’s showed his true colours. I’d get legal
advice.

Good luck.

You don't need a solicitor here, you need an accountant you specialises in estates and trusts.

There are several things that come to mind as potential issues with HMRC.

The gift could be liable to taper relief and only be taxed at 8%, but more likely would be viewed as a gift with reservation of benefit and therefore still at full rate.

If you take the alternative tac of claiming it was quid pro quo, then HMRC could well argue it was money given to you for the provision of a service (ie care) and therefore you owe income tax on the value.

You get the accountants view in writing and then fill in IHT 400 / Probate Application accordingly - if it is questioned at any point by HMRC you have your accountants view to hand.

We had a similar issue with my dads estate, solicitors could not advise, but accountants were brilliant, cost £500 for a full breakdown in writing with insurance against the cost of any investigation arising.

The extra complexity is the dispute with the brother, and its legal advice for that, armed with clear financial details.

Bad idea, then OP would owe the HMRC income tax on that value.

Thanks everyone.
Will take advice from specialist accountant.
appreciate all the help.

Not without financial proof of the care costs and op mums income

And again the fact that if the money was given in the provision of a service, then it would be counted for income tax, would need to have gone through self assessment etc..

Gifts, for tax purposes, have to be made "out of love" and not with expectation of anything in return - the tax man has no separate provisions for money given to family for care - they should have, but don't!

Ok so seems best option is for us to pay the IHT on the cost of loft extension as it was a gift. Quid pro quo worries me due to additional tax implications.
feel very stupid now but all we were trying to do the best thing for her at the time.

I wanted to correct some advice above about taper relief. In practice, taper relief only comes into effect where any gifts total more than £325k. This means that if you declare the renovation costs as a gift, you will effectively be paying the full 40% IHT anyway, irrespective of whether it's classed as with or without reservation of benefit.

The way IHT works is that the total of all gifts are deducted from the £325k allowance first. So if the renovations cost £75k and there were no other gifts, you would only have £250k tax free allowance remaining. The estate pay 40% IHT on any estate assets above that amount. This has the same effect as paying the full 40% on all gifts up to £325k, even if they were given 6 years and 364 days before date of death (ask me how I know this...).

So unless gifts of more than £325k were made, declaring this as a gift will make no difference to the IHT you have to pay as you will be paying 40% on it anyway.

Also, given that the brother is a residuary beneficiary, he is entitled to a copy of the estate accounts which the executors have to prepare. But there is absolutely no requirement to 'even things out' as BiL wants. And BiL is entitled only to the % of the residue stated in the will. This means you are best to take advice from HMRC as to how you should class that gift on the IHT form, so that brother has no grounds to report you or challenge it.

Is it a gift though? presumably she lived rent free so surely her investment can be offset in lieu of rent? like she paid rent upfront?

Very true, but as the gift was lived in by the mother, then it would likely be viewed as a gift with reservation of benefit in any case.

OP was your MiL married to FiL at the time of his death?, in that case there could be up to a further £325K of tax free allowance that could be claimed.

That would be taxable though, and OP could be fined for failing to declare on annual self assessment.

Two certainties in life death and taxes, the HMRC will get their %age whatever!! you just have to work within the rules to keep that as low as it will go.

Problem with taking advice from HMRC, is that you will get as many answers as people you speak to, a professional accountant will use the HMRC guidance and form an opinion based on that information.

They will offer indemnity insurance to protect the client if that opinion is considered wrong.

You are probably right there - we spoke to several HMRC advisors on the helpline and they weren't always entirely consistent until we started quoting their guidance back at them. We also ended up seeing a specialist accountant just to be sure. My main point was about the taper relief though, as it is so often explained in a way that is misleading.

@Mrspopper several thoughts

Inheritance Tax
As pp have said there is the personal allowance of £325k. The second is the residential nil rate band (RNRB) of up to £175k depending on the value of the property. The RNRB is potentially claimable even though the property was sold to allow MIL to downsize. Finally, as pp have suggested if she was married to FIL and he didn’t use all his IHT allowance she may inherit that. Theoretically you may be working with an IHT threshold of £1 million.

I agree with a pp that by not charging rent potentially this was a gift with reservation for IHT purposes.

Gift/paying for extension & living costs
This is more complex but if everyone is fair and reasonable it can be resolved.
Ideally you would have done a legal agreement before MIL paid for the extension but obviously the time has passed. You may find that legally MIL had a beneficial interest in your property.

To me you need to take the emotion out of it and think pragmatically. There are several options which are MIL had a beneficial interest in the house, you treat the money as a loan or mortgage, you treat the money as advanced rent. How much rent would MIL have paid including bills and food?

The simplest example is if MIL loaned you £80k to build the extension and you charged her rent including food and bills of £1000 per month. 4 years = 48 months so £48k rent. £80k - £48k = £32 K to be split as per will. The question is how much care did you provide, did you pay for holidays etc?

I agree consulting an STEP accountant or solicitor is the right thing to do.