How best to sort out this inheritance/property muddle?

[MossyOilTank]

I'm one of three siblings. We were very lucky to be brought up in a lovely large house in a rural setting, with a long and sentimental family history behind it. My parents still live there. It needs to be modernised and they are ageing/unwell and maybe a bit in denial about how impractical it is.

They also own a small house in the local village which came to them by inheritance.

The situation with me and my siblings is that two of us have our own (mortgaged) homes in locations we need to be in for work/family reasons. The other sibling has been living in the cottage with their family for several years, rent-free as their income is limited. None of us begrudge this

The cottage is soon going to be too small for their family though, and they therefore need to move or extend it. However they have no capital and aren't in a position to borrow anywhere near enough to buy a bigger house.

We're all in agreement that this cottage could just be gifted to the sibling in question, and they've offered to be written out of their share of the large house - we don't really feel the need to do that, although I'm aware this is one of those things that could turn sour later.

However, my parents are elderly and worried about tax implications. I'm inclined to think that's a bridge we cross when we get to it and ultimately tax will come out of the estate, but I think it's enough of a worry to paralyse their decision-making. Partly the concern comes from whether we inheritors could be later forced to sell the large house to pay a tax bill. Personally I can't see that any of us would be in a position to buy the others out anyway so it all seems inevitable to me - heartbreakingly sad, but inevitable.

A house swap isn't possible for practical reasons. I think a good solution would be for our parents to sell the large house, buy somewhere smaller and more practical, and gift the cottage now, so that my sibling can get on with extending it or at least using it as capital for a mortgage on a bigger home.

Can anyone see any pitfalls/better solutions/risks etc? It's so complicated our heads hurt over it. We're in Scotland if that makes a difference.

Any idea of the rough values of each (the cottage and the house)?

But I would agree with you, the practical solution would seem to be to gift the cottage, sell the house and parents move to somewhere more practical, and inheritance tax just is whatever it is.

The other consideration would be potential deprivation of assets (the cottage) which would be relevant if they currently have a reasonable expectation of needing care. However presumably the sale of the large house would leave enough to purchase a care annuity should it be needed.

ETA sorry, only just realised this is in “legal”. I have no legal background at all.

CGT will be due on the disposal of the cottage to your sibling by your parents, even though no money changes hands.

If one or both of your parents die within 7 years the gift would be included within their estates for IHT. Their nil rate bands will be offset against the gift first and if their share of the gift of the cottage was valued at more than £325k at the date of the gift then your sibling would be liable to pay the tax themselves. Presumably the cottage is worth less than £750k 😅 but thought I’d mention as not many realise that recipients can be liable to pay IHT on death. The IHT liability on the rest of the estate is paid by the estate.

Your solution sounds sensible to me but I would get an IFA to talk to your parents/all affected to explain the best way forward and the implications of different courses of action.

It seems that the sibling in the cottage is the one who is most likely to be called on by your parents to give practical day-to-day support, so the cottage might be able to be considered a benefit in kind.

people will soon chime in about how unfair it is and how one sibling appears to "get more".
however i'm with you on gifting it to the one in NEED (allowing them to be able to sell or extend).
crossing the bridge when the time is closer, at a certain age probably best to review the will every 5 years.

If you can, persuade them that if they are worried about tax costs etc you can set up a meeting for them with a solicitor who can explain the situation (amount of tax liability, implication of gifting the cottage and redoing will etc) and guide them towards making a decision. This could well save them money, and set their minds at rest. My parents responded much better to a solicitor telling them the realities and being encouraged to make a decision than the going round in circles with me.

This is correct. There will be a potentially sizeable dry tax charge which it doesn't sound as if anyone has the liquidity to pay. I think that makes the idea a non-starter.

If the parents have a good idea who will die first (eg if one gets a terminal diagnosis), then excellent planning is for them to put the cottage into the hands of the one likely to die first, and for that person's will to leave it to the other. That way the CGT uplift will be wiped on first death and there will be no IHT on first death as left to a spouse.

If the living spouse then immediately gifts to your sibling, there is no CGT (due to the first death uplift) and a chance the second spouse will live at least 3 years and IHT taper will start.

@MossyOilTank if the estate as a whole will be worth £1million+ there will be inheritance tax implications with capital gifting anyway unless your parents live for more than 7 years.
If that's likely, gifting the cottage now would take it out of the estate on a tapered basis up to the years.
However they established the will thereafter, you and your sibling could vary it later to include your other sibling if they had already had their 'share' with the cottage if you so wished at that time.
Estate planning is a complex area. Best to get specialist advice really.

I agree totally with what you say.

"...and if their share of the gift of the cottage was valued at more than £325k at the date of the gift then your sibling would be liable to pay the tax themselves. Presumably the cottage is worth less than £750k 😅 "

However, just to make this clear to others, the parents can gift up to £325k each. So, the child can inherit up to £325,000 from each parent. This means that as long as the cottage is worth less than £650k then the child will not face any IHT bill (I presume £750k was a typo?).

[EDIT]

This is working on the basis that the parents own the cottage jointly or as tenants in common. If just one parent owns the cottage then there is just one lot of £325k available.

My parents finally accepted that we were never going to live in the house. It was just too remote. It was better that it be sold to someone who would take care of it properly. It was difficult for them to accept and we were sad to see it go, but it was necessary.

If that is the case for you, accepting that the house will be sold upon their deaths may simplify this issue.

Perhaps more accurate to say " the Scottish equivalent of 'tenants in common' "

I think you should take specialist advice - the rules in Scotland will be very different so you’ll get a lot of irrelevant but well meaning advice from people with experience of the English system!

I agree, an inheritance tax planner would be ideal.

Sorry, thanks for that. I missed the bit right at the bottom where she mentions Scotland.

IHT is the same across the UK. The only realdifference in IHT planning in Scotland in comparison to England is the potential to claim legal rights.

There is no difference when it comes to IHT.

There is a difference when it comes to moveable property (ie everything else except property or land) but we are talking about a house here.

The rules on intestacy are also very different, but again, IHT is the same in Scotland as it is in England & Wales.

Ok I don’t know the Scottish rules at all, but I think IHT is not the only issue here - also deprivation of assets to think about. But in general a Scottish qualified advisor is going to be best placed to know whether there are any other wrinkles!

The parents down sizing has nothing to do with gifting the cottage, I wouldn't try linking the two as that will add confusion. There is the seven year rule on gifts (in England anyway) so the sooner the better to gift the cottage. But it could also be seen as deprivation of assets if the parents need care in the future (English law again). I know rules of inheritance are different in Scotland in some respects.