Question on inheritance tax.

[Martha200]

OK, a friend has been advised by his solicitor to ask his Dad to sign 2/3 of the fathers house over to his sister and himself because it takes it out of inheritance tax. We are not sure it actually does avoid inheritance tax, and also not sure what impacts (either positive or negative) it would have if at any point he had to go into care...

any advice?

Oooooooooh bit of a complex area really and not as simple as it sounds. If dad does sign it over and carries on living there then it is pointless and the value of the house will still be included for IT - the Inland Revenue specifically look for people trying to dodge IT by doing this, and won't let it work.

Unless, that is, he is paying market rent to the children whilst living there, but in that case then the children would have to pay income tax on that rent.

Your friend should probably get a second opinion from a different solicitor. I am not a lawyer, but I think that if the father doesn't live for more than seven years after making the gift it's all fully taxable anyway.

There is an allowance of (I think - may need to check recent figures) £3000 that a person can give away in any tax year (you can backdate for one year if previous year's allowance is unused). Any other gifts will still be subject to inheritance tax if the donor does not survive the gift by seven years.

If the father needs to go into care not long after signing over the house, then the local authority may well consider that he did so in order to avoid having to pay his own care costs. Not sure what the procedure is in that case.

The father should have his own legal advice as there have been a number of cases where parents have signed property over to children for this purpose only to later find that the children chuck them out of the house in order to benefit from its value. Not saying that your friend and his sister would do this, but their father needs to be aware of exactly what he is doing and the potential consequences. Even if he still owned 1/3 of the house, the owners of the other 2/3 could force a sale.

I don't think that it would now avoid IHT unless friend and sister actually lived there. But if the house is now owned by three tenants in common, it would impact on care costs. If the father was in long term care and ran out of capital, the local authority would only be able to access the proceeds of one third of the house (perhaps someone more knowledgeable could tell you whether a sale could be forced)>

If only the father is living in the house, I don't see that a court would prevent the sale of the property to cover care costs. If either the friend or his sister were living there, it would be different.

There exists legislation to prevent people from avoiding such costs and IHT, but this very much depends on the time lapse between the act (such as a gift or transfer of property) and the need for care or the death of the donor.

Martha200 tell your friend this wont work and is dangerous for all sorts of reasons not just tax.

I am a solicitor with 20 years experience in this very area and it amazes me how many fellow members of my own profession give wrong advice in this area.

Find a new solicitor quick!

mummypoppins - thanks. My friend thought it very odd advice at the time and apparently had started to make a negative list for his Dad, always good to have more reassurance!!

Yes, I agree with the others although it does depend on the situation. We took a lot of advice on my mother's death and we own her half of the house where only my father lives but that's a slightly different situation from the one you described. Did his father own it with his wife who has now died? I assume not. There's a pre-owned assets test thing to check and something about reservations of benefit. I think if you gives the asset away and then pay a market rent you can avoid that rule though and that's another possibility may be.

Also he could sell the house and give 2/3 of the proceeds to the children now, live 7 years an they would avoid IHT on that 2/3 but that only works if he doesn't need to live there, could move in with them or rent or downsize.

go to this website and find a local financial adviser who specialises in IHT issues.

If you (or more relevantly, your friend) are in SE Wales, CAT me...

This is not my field. I mean tax is my field but not inheritance tax. So you need to talk to someone who really knows about this area.

Now the disclaimer bit is over, I am absolutely sure this no longer works. It's a gift with reservation of benefit.

But it would work if some of the points I mentioned held... like it was his father's wife's share they were talking about or if it were set up where the father pays a market rent and then I think the reservation of benefit rules don't apply. Some people are choosing to pay those rents if they can afford it.

bonkers advice from IHT and CGT point of view.

Classic gift with reservation. Pre owned assets absolutely not relevant as it is a gift with reservation which kicks in first.

Obviously does not work for IHT (unless market rent paid or joint occupation etc) and no CGT free uplift at death.

Consult a qualified tax adviser (CTA) or ideally a solicitor who is also a qualified tax adviser.