Inheritance tax when selling houses between family members?

[TaxItOrLoseIt]

Name change.

I don't want to drop feed, but some areas may be vague to protect others.

My friend, Jane and her DH are going to buy Jane's Mum's house. They will pay the market value. Jane's Mum (who is alive) wants to do this so she can pay her loved ones their inheritance while she is alive to see them enjoy it. Jane's Mum will live with Jane and her husband but there is talk of building her a 'granny flat' on the land. Jane will also inherit from this sale.

I was chatting to someone about houses/prices of property in the local area, and relayed this set-up to them. The person said they will owe inheritance tax once Jane's mum passes. (Jane's mum is in her early 90s, in good health and sound mind). Jane doesn't know much about legal stuff but her husband is adamant they won't have to pay because the sale of the house is all above board - which it is. I mentioned it when I popped round for coffee and they were talking about using some of the money for a holiday and some DIY jobs at Jane's mum's house when it is theirs.

I'm naive about this stuff, but I'm worried for Jane and her kids who will inherit substantial amounts of money and may end up with hefty inheritance tax bills because all inheriting have basically already spent the money in their heads. One child using it for a house deposit, another travelling, that kind of thing.

Is Jane's DH being a bit of a fool? Surely if there is a solicitor involved to oversee the sale of the property, they would inform Jane and her husband about inheritance tax? I don't think they are intentionally trying to avoid paying inheritance tax, I think they think it's a win win situation for everyone involved and they're helping Jane's mum.

Okay but you say that the estate isn't that big in which case why are they worrying about inheritance tax? Inheritance tax will only apply if the mum's assets are worth more than a million pounds assuming that her husband did not use up his allowances before he died..

Are the mum's assets worth more than a million pounds?

Jane would still have to pay stamp duty on the purchase too.

Terrible idea!
There are lots of naive people like the mother and the son in law who think they v are c bring clever but serrinv up a huge mess for legatees.
They need to consult an IHT expert -a conveyancing solicitor won’t have the expertise /they will only be concerned about the house sale. As others others have said, she is removing the advantage she would have in passing the house to children. And as she is in her 90s, the lilelihood of her dying beg 7 years is high, so depending on size of estate IHT could be payable in the gifts.
Also the issue of deliberate deprivation of assets re potential care costs.
Estate planning needs to happen many years before the person expects to die to be effective.

I think then for IHT purposes they will be OK. The fly in the ointment could be if she ever needs care and applies to the local council for funding if she has no money left. They will class it as deprivation of assets so will claw the money back from the family..They will need advice on this or an agreement that the family will pay if it's needed.

What if their relationship breaks down? Or mum needs care? Deprivation of assets. Jane gets dumped with care whilst siblings enjoy their "inheritance ".

What happens if Jane predeceases her DM?

DM is effectively losing all her security.

It's dodgy on all sorts of levels.

If the house is purchased, it doesn’t matter who purchases it. The money goes into the mums estate. If over the applicable threshold, IHT is payable. The 7 year rule doesn’t apply on the sale.

It will on subsequent gifts over £3000 a year. So the mum can give £3000 per year to dc and grandchildren. (Check this?) but anything bigger, the 7 year rule applies. This means if she doesn’t live for 7 years, then IHT will be payable in decreasing amounts according to length of time lived. The mum is very late in doing this! Therefore any beneficiaries need to keep 40% liquid in the event of mum dying. Decreasing every year. The people receiving the money can spend the rest of the gift quite happily.

Just to say, it’s not dodgy to have a relative living with you. Draw up legal agreements on who owns what and be clear about transfer of money. The mum needs to be clear about who is paying for the annexe and who will own it and is it a gift to the dd looking after her, Jane? Other family members might be happy with this but again, the gift will be subject to IHT if applicable and 7 years of further life is not reached by mum.

The taper isn't immediate, so the tax does doesn't decrease every year.

For the first 3 years the full 40% tax rate appllies. In the 4th year this reduces to 32%, 5th year 24%, 6th year 16%, 7th year 8% and after the full 7 years are complete no IHT (provided there have been no later gifts, gifts with reservations of benefits or other complications).

@ProfessorBinturong Yes. I hadn’t looked it up - however someone aged 90 plus has left this arrangement very late!

I think this could actually be counter productive.

If passing on the family home you get a higher IHT allowance.
But I don't know how that works if it has been sold already.

If the family home has already been sold, the RNRB is lost. Whether that matters depends on how much the estate is worth. If OP is correct and Jane's DH's father left everything to his wife, she can leave up to £650k without incurring IHT if she sells the house before she dies, £1M if she keeps the house.

So yes, proceeding as suggested could result in an IHT bill which would be avoided if Jane's DH's mother simply left the house to Jane's DH in her will. Also, as others have pointed out, it could be regarded as deprivation of assets if Jane's mother needs care.

Jane's DH is clearly wrong if he thinks there is no chance of any IHT implications from the proposed course of action. They need to take proper advice from a solicitor.

They need to stop looking at it as Inheritance, you only get that when someone dies. The Mum is going to give them a large sum of money which could be counted for IHT when she dies. There could also be other tax implications for everyone concerned so they need expert advice on that. If Mum ever needs care then itt could be DOA, which there is no time limit on

@prh47bridge The point of selling the house to Jane is to release capital to give to others before death. Therefore it’s releasing assets for others so they don’t have to wait. She can keep
money back for a care home. Quite a few people do make arrangements like this and are cared for in the granny annexe.

If the sale is truly at market rate and this can be proved ( several independent valuations by local estate agents for instance) then the transfer isn’t a gift and cannot be held to be part of the parent’s estate after sale. The parents will receive cash to the value of the house in exchange and that will still be in the estate unless they spend it all. Gifting that cash would of course mean that all the IHT rules re gifts would come into force.

I am aware of that. Simply setting out the pitfalls, especially as it appears from the OP that Jane's husband and his mother aren't aware of them.

That’s not true - downsizing exemption can allow the RNRB to still apply post sale.

Why do you think pre owned asset tax doesn’t apply?

Surely tax doesn’t apply on the sale as it’s the mother’s primary residence. Tax only applies on money left (if over allowances) or money gifted and the 7 year rule. That’s why I would shift some of the money as a ‘gift’ by charging rent and anything else I could.

@OnGoldenPond I thought the idea was to distribute the cash for the house to beneficiaries - pre death? That’s why we have been discussing the 7 year gift rules and IHT.

They really need proper advice on the whole plan, not just the house sale. I imagine they think that they are avoiding the application of the reservation of benefit rules by structuring it like this, but they're likely to fall within the pre-owned asset rules instead.

The sale on its own should be ok if it's genuinely at market value (although they will need to pay stamp duty)- would suggest they get a proper valuation done in order to demonstrate this. The difficult bits are the gift of the proceeds of sale to the children- that's a potentially exempt transfer for IHT purposes (and possibly deprivation of assets- I don't know much about this so shan't say any more) so could be subject to IHT, and the fact of the mum moving back in. As pp says, giving the proceeds of sale back to the buyer to allow them to pay off the mortgage they used to buy the house could bring all of this within the pre-owned asset regime.

So, all sorts of problems- the arrangements don't appear to achieve the aim (if that is taking the value of the house out of the estate for IHT purposes), there's stamp duty to pay and there might well be POAT as well. They need to take advice from a tax specialist in relation to the whole plan, not just a conveyancing solicitor in relation to the property sale. The whole thing reads like an exam question in a tax exam 😂

I think the new granny annexe is to get one the POAT rules. Or granny can elect to opt out of this and have her estate subject to IHT. This is difficult as she’s already in her 90s. Yes, advice on this is crucial because the granny annexe determination is crucial here. Is it still having an interest in the original asset? Or separate? If under IHT thresholds, opt for IHT instead of course.

It's surely no different to buying any house? So what's the benefit in buying it off your family rather than a stranger? Unless the money to buy it has come from within the family and the sale is purely to try and dodge IT. Therefore not above board? Yeah I'm confused too 🤔

Child buys house from mum, mum gives some of the money recieved straight back to child, and distributes the rest to other family members.

[Edit] So essentially the child buying the house gets it at a discount, andhe rest of the family gets money they think will escape IHT (they are probably wrong).

Surely this would also work…mum sells house to stranger and gives money split among her children

That would be a whole lot simpler, but the stranger would probably object to the mum continuing to live in the garden.