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!

What part of the UK is this?
seems absolutely crazy increase in such a short time.

This is the exact reason so many families have given their homes to the National Trust over the years.
Most people end up having to sell to pay the IHT.

A work colleague bought a flat in docklands for £100k in early 2000's. Sold it for £1.5 million less than 10 years later. Absolutely bonkers.

Clearly the answer is to sell it at that point and accept you've acquired a vast amount of money, the fact you have to pay tax /share the proceeds is quite reasonable really

Plus it sounds like you are also getting to live rent free there at the moment, so presumably can start saving as well?

Infact, this is so bizarrely naive I am wondering if it is a reverse

I was going to point out that inheritance tax is 40% (not 20% as in original post). It horrified me when my close relative died and I sorted her will. No other advice really.

Honestly crazy… I sold my flat after almost a decade and lost 75k so I don’t see how they’ve managed this tbh

HMRC will do a loan to cover inheritance tax. Then you could rent out rooms to pay this back.

HMRC will allow you to pay off the IHT over 10 years with an eye watering amount of interest.

On a salary of £35k there’s no chance you can pay off £25k+ a year to HMRC.

Sell the house
give your sister her share
Buy a smaller place or a different area and enjoy your wealth

Absolutely unreal house price increase! Was it a council property bought with a discount?

I bought a shabby 3 bed terrace in a now very desirable area of London 20 years ago. It was not a desirable area when I bought. In that time the value has gone from £350,000 to around a million (absolutely crazy I know) so how a £72,000 house can be worth nearly £1.5 million now seems unbelievable.

This.

How old are your parents? Do they have enough life ahead of them to sign the property over to your name therefore avoiding inheritance tax - providing they live long enough and don’t go in to a home whereby the gov will say them signing it over was an attempt to avoid the asset being seen

Not the point of the thread but I also bought a house in London then - in 2005 - and it was 600k. You couldn't get anything for 72k in any of the (many many) areas we looked at. The house we bought is now worth almost exactly what your parents' house is worth (in a very desirable area having done lots of work to it) so I'm not sure if your sums are correct...

There aren't many single people earning £35,000 living in £1.5 million houses, so don't feel too hard done by.

There might be something slightly odd like you buying into the property now (possibly taking into account the rent you’ve paid so far, and then the future rent you pay gets counted as a private mortgage payment).

So essentially you start buying a share of it over time. Which reduces the portion within the inheritance taxed estate. Then you inherit your share, and the ‘issue’ is your sisters share.

If there are non property assets to take into account then she could have all of those and reduce the amount of the house she gets.

One where some professional advice is probably worth while. Not just on the tax front, your right to live there being protected should one die before tye other is another factor.

Your calculation is wrong if both your mum and dad are still alive. Your mum and dad both have £500,000 of IHT allowance (£325K NRB + 175K RNRB) this can be claimed later by you if they leave their half to each other.

So that's £1M tax free

The rest is taxed at 40% (IHT standard rate), but this can be paid over 10 years.

That doesn't work, if the parents continue to live in the house it is classed as a "gift with reservation of benefit" Maning it attracts the same taxation regardless of timeframe.

Actually is does make a difference if he’s your stepdad I think. If your mum and stepdad were previously married and widowed, their partners allowance of 325 (I think) would have passed to them.

Your parents should ideally break the Joint Tenancy (if they hold the house that way) to Tenants in Common and re-write their wills directing that whoever dies first their share be put in a life interest trust for the survivor and then to you as children on the survivors death.

This goes some way to protecting against care home fees in a bullet proof way.

It goes with the present marriage, if they are divorced and re-married the arrangement exists between the married couple, if there is no marriage it does not pass.

I think re-marriage nullifies the previous NRB

@LindorDoubleChoc my in-laws house was 40k & now worth 2m but bought in the 80s.

The £175 RNRB only applies to homes that have been lived in by the people that have died so it doesn’t t sound like it’s going to apply.

OP, Mumsnet has loads of helpful and knowledgeable posters but you need to get proper tax advice on this from a company or person that specializes in inheritance tax. It should give everyone some peace of mind to get this sorted out now.

It might be possible for the parents to simply gift the house to the OP. They just have to live 7 years. If it’s needed for care home fees then you could sell it at a later date and downsize. But check with a professional!!!!!

Not the same situation as you, but one of my parents lived in a villa in a tourist destination which had been designed and built as a retirement home. For decades it had always been my intention to buy out the sibling I have with this parent and keep the house as a holiday home before retiring to it myself. The rest of the family were totally on board with this.

The house has appreciated far, far more in value than any of us ever envisaged and with various other potential financial commitments in the pipeline I am no longer in a position to buy this sibling out. The position is mutual. We are therefore forced to sell it.

This country doesn't have inheritance tax on transfers to children so that's not an issue, but it does have CGT on residential property. What makes it worse is that the CGT is not calculated on the capital gain from the probate value like it is in the UK, but from the gain against the rateable value, which in turn is based on the original purchase price (from the late 80s - we're talking roughly similar figures to yours). Even worse, since Brexit I can no longer opt to use the CGT regime for tax residents there (which in my case would be only 12.5% on 50% of the capital gain), but have to pay the foreigners' rate (28% on the entire capital gain).

So instead of paying my sibling half the value and riding off into the sunset to a house I spent years planning a retirement in and have contributed enormously to in maintenance and improvements with free labour, I now have to pay 28% of my half in tax, and plan a very different retirement.

Shit happens. It's not ideal but I'm still going to receive a substantial six figure sum for nothing more than having the good fortune to be the child of my parent. I can't really complain about the injustice of it all, because there isn't any.

I'm fucking fuming about Brexit though.