In-laws panicking about inheritance tax

[AhBiscuits]

My inlaws split their time between two properties. They want to sign one over to us and then pay us rent to use it. The purpose is to reduce the inheritance tax on their estate. Apparently the rent is necessary to avoid the tax, I dont really know anything about it. Neither of them are likely to die in the next 7 years, MIL is likely to live another 20 if she follows her mother's lead.
Property is worth about 800k and they are proposing 2k a month as market rent. Is there any point in this? We'll have to pay tax on the rent and if it does go on for 20 years or so will they even save anything?
They clearly need to take some proper advice before rushing into anything, but I wondered if anyone had any thoughts. Is there some glaringly obvious issue they're not seeing?

The only tax efficient way they can do this is by giving it in trust for your children and paying them. Setting up the trust, however , is complicated: they need to speak to a solicitor.

I'm always amazed how people would seemingly use Mumsnet for advice about transactions involving hundreds of thousands of pounds.

They should pay for professional advice.

People do try to reduce their tax burden but the government is wise to it and there are many pitfalls.

This why I ALWAYS just tell people to consult an Estate Planner. If you have any sort of estate to leave, make sure you get the right advice and don't leave a mess or huge bills for your family to deal with. This doesn't mean evading tax, it means following the law in the most efficient manner and not making foolish mistakes.

Or maybe hard work and investing should be rewarded. Some people, get everything handed to them and while my parents were working their arses off others were enjoying life. I'm not bothered about inheritance I would much prefer my parents enjoyed their retirement ( although, they are still working the business so not fully retired). But they want their children/ grandchildren to inherit from their hard work.
They both came from poverty so everything they have achieved has been through hard work and sacrifices.

So? You win some, you lose some.

I bought high due to house price increases sold some for very little more. I'm not bitter enough to begrudge someone who got lucky with house increases.

The point stands that people are taxed over and over, so went shouldn't they try to avoid being taxed yet again (it's not like they'll avoid it totally).

Most houses that end up in IHT territory have massively increased in value just because of market forces. I bought my first house for £18k, it’s recently been sold for £325k. If I had kept it all those years I would have made over £300k profit by doing sod all.
In addition, the person inheriting an £800k house has done sod all to earn that money too,

So? It's theirs, not yours or mine.

@AhBiscuits just get your name added to the deeds. when they die it falls to the remaining owners.

It's not a sensible idea if the property was worth a lot less when they bought it.

Would be more cost effective to put it in a ltd company and make them all directors to avoid inheritance tax.

Such is life 🤷

they aren't avoiding being taxed if they're dead, they're being petty

No, they're wanting to help out their next generation. What's wrong with that?

no it wouldn't

Ltd's that you control are 'connected persons' too so the CGT market Value rule still applies

Sounds like there is plenty of point in this scheme. Other issues apart, you really have no guarantee that they will live 20 years, and the sooner they start planning, the better.

signing over the house to you would be a disposal subject to capital gains tax. If they die within 7 years there will also be IHT to pay.
Putting a property worth over £325k into trust will give you an immediate 20% tax liability with periodic tax charges on top. And the 7year rule also still applies.
There is not an easy way to get around this.
They could take out a loan against the house and gift you the money. Again, same rules apply and the loan could cost more in the long run.

So the children/grandchildren will ‘get everything handed to them’ but that’s ok because the generation before were in poverty before they were successful? Alrighty then.

They’ve already paid that through their normal taxes. Why shouldn’t people want to avoid paying tax over and over?

Unlikely that the house hasn’t increased in value and we all do this anyway.

It’s pretty complicated so you need tax advice but it’s likely better for them to sell or just pay some tax when they die.

The point stands that people are taxed over and over, so went shouldn't they try to avoid being taxed yet again (it's not like they'll avoid it totally).

We have a huge issue with our public services, wage stagnation, shrinking tax paying population, ageing population. I would rather more tax came out of my inheritance than my income.

I'm not bitter enough to begrudge someone who got lucky with house increases.

It’s not about being bitter, it’s about logic. We need workers, work has to pay. What you do or don’t inherit shouldn’t be more important than your job/salary, it’s not progressive.

Are they living in the property so they pay you market rent to stay there once you become legal owners? What about the other property, which one is classed as their main residence for CGT etc? But, yes it seems like a very good idea, you want the renting to be properly legal so it isn't a gift with reservations. And clarify the status of the two houses.

If or when you sell the house, if you don't live there for some time to mitigate (it's complicated), you will be liable for CGT on the increase in value.

With the seven years rule there is tapering so the longer they live into the seven years the lower percentage of the gift is included in IHT.

if they were to gift you the house but live rent free, then for IHT purposes they haven’t really gifted it and it remains in their estate. This is why they want to pay you market rent to live in the property. It’s called gift with reservation of benefit.

your in-laws need to get tax advice from an accountancy practise with a tax division NOT advice from a solicitor.

They may be able to move their other assets instead. The tax advisor will review all their assets and advise them on the most efficient way to plan.

nothing will happen before the budget though.

There is no SDLT payable when a property is given if there is no mortgage on the property.

But they will probably have to pay CGT on the increase in value since they bought it. And then you would have to pay CGT when you sold it in the future.

And you would have to pay any increased council tax that the LA charges on second homes.

No one even knows what the budget will say .

Do your inlaws realise that there could be four of five changes of government (and therefore IHT) before they die? Why panic.

this is a big misconception. if they had genuinely wanted to do that, they would have chosen a different use of the money originally.

I assume they still want to use the house? Hence why they are planning on paying you rent. They could just gift it to you outright, but then they wouldn’t be able to use it themselves legally (or at least in terms of tax planning)

It is a definite viable inheritance tax planning strategy. They haven’t just made it up from nowhere! However they, and you, should take proper professional advice. Especially considering the numbers involved.

As far as you’re concerned, you’ll gain an 800k property and 2k per month income. The income will be subject to tax. You will also have to register as a landlord etc but that’s not particularly onerous, and it’s not like you’re going to have nightmare tenants! Presumably they will cover things such as stamp duty on the sale, but those costs need to be considered.

They will have to pay capital gains tax on the transfer. That is (currently!) around 20% tax on the gain on the property. If they live 7 years there is no inheritance tax.

If they don’t live 7 years (or don’t do the gift) then when they die the property will be subject to inheritance tax presumably on its full value at (currently) 40%. So yes a big difference potentially!

This is legal. Whether it is moral is another discussion, but it’s well within sensible tax planning rules and isn’t remotely dodgy. Of course the new budget could change it all, but noone knows what’s going to happen there.

Deprivation of assets for care home fees etc is completely separate matter and has different rules. Although it does sound like that are wealthy enough for this not to be a concern anyway.