Home bought cheap by parents, gone up HUGELY in value, children (me and sister) wouldn't be able to afford to keep it

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I'm hoping someone can point us towards a financial adviser company/person that can help figure this out so we don't lose out (if avoidable).

So the scenario is my parents bought a house (for £72,000) about 20-odd years ago, and it's now potentially worth £1,475,000. Seems great, right?

But the issue is that I live in the home (paying rent) and when they die, assuming my sister and I are still alive, I wouldn't be able to afford to pay the inheritance tax on the property. As I live in it, I understand the first £500,000 is untaxed, but that'd still leave around 20% of around 1,000,000 so £200,000 to pay out in order to stay in the home. My sister has no interest in the home so I'd obviously have to give her her share of the value of the home too. Impossible as I earn around £35K a year.

Has anyone had any experience of a similar situation? Have you had to sell a property simply because you couldn't afford the inheritance tax part of it?

My mum particularly is worried and wants to find out if there is any way she can protect the home for us because she bought it as a 'small modest home' (her words) so we'd always have a place to stay. The house prices have just gone crazy where we are. Thanks for any advice or thoughts or recommendations!

If you sold the house and split the proceeds it sounds like you would still be looking at £600K each - that sounds like you could turn that one original house into the money to buy two flats (or in fact two houses, if you choose your location wisely or have any additional capital to invest), one for each of you.

That still seems like a way of providing housing security to her daughters and would be more appropriate now you are both adults and not actually likely to be living together again.

Wow that's a massive increase in 20 years! London? But even so!

I was thinking the same!
I would have guessed 40ish years for that kind of inflation

Are your parents married? and is this their main residence? If so, between nil rate band and residence nil rate band they should be able to leave the first 1 million of the estate tax free to direct descendants. If your sister wants her share and you can't afford to buy her out and the inheritance tax then of course you will have to sell.

If they don't live in it and you're looking at having it put in yours and your sister's names to avoid IHT this can seriously bite you in the arse if they die or they need care home fees paid

I'd expect to have to sell it and use the proceeds to buy a place of your own that is the right size for you to afford to maintain. I'm not good at the maths but you'd clear about £500k each wouldn't you? That can get you a 2-bed flat even in London zone 2 if you look carefully.

This

You say ‘protect the home for US’ but your sister doesn’t want it, so surely it’s just for you? Do they want to protect the house or the money? Your sister will only get benefit from the latter, because she won’t benefit from the former if she’s not living there.

The IHT won’t be that high as whatever parent dies first passes their allowances to surviving spouse(although IHT is 40%, not 20%). But if you want to live there then you either need your sister to accept she will get nothing as inheritance or be able to buy her out.

This all assumes that your parents are still living in the house when they pass away. What happens if one or both of them need care? The value of the home will be taken into consideration so unless they have substantial additional resources to pay for this care you may end up having to sell anyway or having the local authority take a charge over the home. If you do end up inheriting the house then you will have to do what many people do and sell up to buy a smaller place. Whilst you may have a sentimental attachment to this house, it’s probably not feasible for you to live there on your own and your parents must realise that, Given that it is to be inherited jointly by you and your sister.

IHT is 40% (not 20%) but you will only pay it over £1m as you get extra nil rate for passing on your home to your kids. Either way though - how are you going to buy your sister out? You'll need to sell it regardless won't you?

I think you will just have to sell it .

Just sell it, you’re still going to be rich as Midas 🤷‍♀️ and be able to buy a property outright

Sell up and buy a place you can afford. It's not rocket science.

She doesn't want to sell it either. But reading through all the comments it does seem that the most sensible thing is simply to sell. I'm not especially emotionally attached to the location, so would be fine with selling and moving! My mum is annoyed about it because, as she says, she didn't ask them to put the house prices up to such stupid prices and thought the house would remain as a home for us when/if we ever needed it (which it has been).

My 'parents' are my mum and stepdad. Not sure if that makes any difference to the whole parent aspect.

(Also, I would be absolutely over the moon with even £100,000 to spend on a home, so as you've said, I'll be okay! I don't NEED it either, I've got a home abroad far away from the UK (worth £40,000... but it's not about what it's worth, I can LIVE there, so I wouldn't be homeless in any of the outcomes!)

You can’t afford it because you would only own half of it and cannot afford the other half. So you sell up and buy something you can afford instead of living in the family home as a single person.

Yes, lots of assumptions that may not turn out to be right! I'm going to talk to my mum and explain all this. It makes sense. And as someone said, I'd be 'rich as Midas' regardless and could afford to buy a property outright elsewhere (where I'd rather be anyway!).

Also, yes, it is London. Absolutely bonkers.

I'm intrigued by where on earth this house could be. I live in a cheap area where you could buy a house for 72,000 in 2005, but it would now be worth about £200k

I guess under right to buy it might be possible

Something else occurs to me

How is your mother's will worded?

If the house is left to your stepfather in her will and she dies first, it will belong to him solely. Who will he leave it to?

That is a massive increase in value. Did your mother do a lot to the house?
After 40 years, ours is worth bout 10 times what we paid for it. No extensions but kept in good order.

You'll have to do what everyone else has to do in this situation, sell and use the money to buy your own property

Depending where you are, her spouse could be entitled to a third to a half of the estate, so you might have to buy out step dad too. And if you inherit from him, instead of directly from her the inheritance tax could be higher.

Would you consider taking out a mortgage against the house to buy out your dsus and pay the tax? If you’re already paying rent, how would mortgage repayments compare?

Does your step dad have any other kids? Is there anyone else it could be left to or is it just you and your sister?

Bottom line is, you can’t afford to live in. Even if you got around inheritance tax, you need to buy your sister out and you can’t afford to. You don’t have any other options. You’ll have to sell, pay any tax and split the leftover 50:50. Sounds like you’ll have plenty of money each so no need for your mum to be upset about “always having a home to come back to.” You can buy a home.

Why not just count yourself lucky. You’re going to be very wealthy purely due to house price increases.

You could buy a house in Hackney for 100k in the late 90s that would be worth that amount but 70k in the mid 00s?

Was it a council house?
You'll obviously have to sell it. There's not really any other way around it. Needs must.

Surely with 2 children to inherit you were likely to have to sell it anyway. That must be the usual route when there are siblings and not an only child and a family home. Is there a reason you still live at home?

So IF there are minimal care costs and the house value stays intact, then your parents HAVE given you a home, just maybe not that property, just the means to buy.