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?

Inheritance tax IS a normal tax. As are CGT and stamp duty.

Lots of people work really hard in minimum wage jobs but never earn enough to buy property and make investments. They are never in a position to use tax loopholes and to make labyrinthine arrangements to avoid inheritance tax.

As a previous poster has stated, many of those with large estates to bequeath to their familes will have benefited from the massive rise in the value of their home. Apparently 20% of pensioners have an estate worth at least £1million, mostly due to the rise in house prices. This wealth has never been taxed.

Yes, but it also destroys the argument that they have already been taxed on this wealth so shouldn't be taxed again and/or that they have worked really hard for this money when all they needed to do was remain in the house for decades and watch the value of the property increase.

They need to get financial advice and not panic into making a huge decision quickly.

https://www.gov.uk/guidance/sdlt-transferring-ownership-of-land-or-property#:~:text=You%20pay%20Stamp%20Duty%20Land,threshold%20for%20the%20property%20type.

“If the transfer is a gift
If the transfer is a gift and there’s no chargeable consideration, Stamp Duty Land Tax does not normally apply. Read ‘if you’re given property as a gift’ section for more information about when Stamp Duty Land Tax is payable.”

The ‘chargeable consideration ‘ being a mortgage, presumably, with reference to other examples they give.

“If you’re given property as a gift
If you get property as a gift you’ll not pay Stamp Duty Land Tax as long as there’s no outstanding mortgage on it.
You’ll pay Stamp Duty Land Tax if you take over some or all of an existing mortgage and the value of the mortgage is over the Stamp Duty Land Tax threshold. “

So I suppose the existence of the mortgage, and the fact the gift effectively lets the person gifting off the mortgage is classed as consideration - everyday’s a school day!

If they have spare money to consider paying rent of £2000 it may be more sensible to look at spending that money on a whole of life insurance policy in trust to cover an IHT liability (this way the tax is still paid but the beneficiaries have the cash to pay it from the insurance policy) rather than gifting assets hastily and causing other tax liabilities.

Basically, they need proper financial advice on which is the best way to arrange their estate. It's sensible to consider it now rather than leaving everything to the beneficiaries to sort later but lots of people get caught up in the "gifting" aspect and don't realise other options exist. Not all options are suitable for all people and that is why personalised advice is crucial.

The time pressure is that it would be tempting to crystallise the cgt on the price uplift of the value of the house (may of course not be relevant if recently bought) under the current cgt rate, as general view seems to be that cgt rates will go up in the budget. There is no especial rush from the point of view of iht as it is the regime that pertains at death that matters, subject always to the fact that if doing something that relies on living 7 years, sooner is better than later.

I don’t understand why anyone is willing to take on the tax costs of putting things in trust (when over the iht allowance). We looked at in when my mother downsized to free up money to buy my brother a house (a major failure to fly situation) and she would have liked it to be in trust so that he couldn’t lever it or sell and squander the proceeds, but the uncertainty about future tax costs killed that otherwise v sensible plan.

Problem is you'd have to pay for landlord insurance to legally rent it to them

I haven't read the replies so this may have been addressed already but it is not necessarily a bad idea.

When it comes to gifting, the starting point is that the value of any gifts fall out with their estate for inheritance tax if they survive for seven years. If they don't quite survive the seven years, a taper relief applies which discounts a percentage of the value.

However, there is an exception to the above in that if your in laws make a gift but reserve a benefit, the full value of the gift will fall within their estate when calculating whether or not inheritance tax is payable regardless of whether they survive seven years. In this case they would continue reserving a benefit in the property if they did not pay rent. One way to circumvent this is for your parents to pay a market rent.

I would recommend that they seek independent advice from a solicitor regarding inheritance tax planning and perhaps a financial advisor.

If they are still keen to proceed, I would also recommend that you obtain independent advice too as there will be pros and cons of you a) receiving the gift and b) receiving rental income. There are other options for your in laws to consider such as setting up a discretionary trust for example which may or may not suit better.

Hope this helps.

We do already have a flat that we rent out so we'd be able to just add it.