I am planning for an elderly couple with the following situation. The couple gifted their second house to their son ten years ago. Now their primary residence has become too large for them to cope with. They would like to move into their son’s house and either gift their primary house (and only property) to their two children, or eventually sell it. Their mirror Will is arranged to pass on all assets to the spouse.
The following questions have arisen which I’d appreciate your perspectives on:
Will they be liable for moving into their son’s home if they were former owners?
If they move in to their son’s house and retain their old residence, will it affect their PPR status for IHT on their home?
If they gift their primary residence to their children before death are their additional liabilities compared with waiting and gifting in their will?
Allan
I’m sure others will be able to give you chapter and verse, but briefly:
yes - pre-owned-assets/gifts with reservation of benefit - they should pay a commercial market rent to their son (on which he will be taxable)
PPR is relevant only for CGT i.e. when they sell or gift their main residence - it is not relevant for IHT
subject to the availability of PPR relief, gifting their main residence should be CGT free. If the PPR relief is restricted in any way then there may be CGT to pay on gifting their primary residence.
Provided they survive 7 years after gifting there will be no IHT, but also they would forfeit any residential nil rate band entitlement. You would have to consider the values of the Estates to see which was the preferable option. They may wish to consider downsizing in order to keep the possibility of RNRB.
I assume there is no mortgage involved as that may trigger SDLT considerations.
Maxine
The lifetime gift of the primary residence to their children would not result in an automatic loss of the RNRB on their death if assets of total value equal to the RNRB were closely inherited.
Thank you for providing such helpful and thought stimulating responses. Below find some specific responses to yours by way of clarification.
yes - pre-owned-assets/gifts with reservation of benefit - they should pay a commercial market rent to their son (on which he will be taxable)
I’m getting conflicting advice on this. While I recognise the GROB avoidance rules you cite apply up to seven years, I am told that this alters after 7 years, when the property ceases to be an active PET and is outside the estate? Their occupancy starts after ten years, so I’m unclear whether commercial market rent is still required?
PPR is relevant only for CGT i.e. when they sell or gift their main residence - it is not relevant for IHT subject to the availability of PPR relief, gifting their main residence should be CGT free. If the PPR relief is restricted in any way then there may be CGT to pay on gifting their primary residence.
Do you mean restricted from going over the allowable threshold?
Provided they survive 7 years after gifting there will be no IHT, but also they would forfeit any residential nil rate band entitlement. You would have to consider the values of the Estates to see which was the preferable option. They may wish to consider downsizing in order to keep the possibility of RNRB.
I assume there is no mortgage involved as that may trigger SDLT considerations.
I take it from Malcolm’s comment that RNRB would not necessarily be forfeited? That’s right there is no mortgage.
Dear Malcolm,
Thanks for your analysis. Do I understand correctly, that if the property is worth £1m (which would equal the surviving spouse’s total IHT allowance), and they survive seven years from the point of their lifetime gift, then it is free of IHT?
Do I take it that all remaining assets in the estate would be liable for IHT upon the survivor’s death?
If the primary (now unoccupied) residence is gifted in lifetime by parents to their two children a CGT charge arises subject to any private residence relief and the annual CGT exempt amount.
For IHT the gift of each parent is a PET and hence falls out of parents’ estates after 7 years. However, a downsizing addition for RNRB purposes will be available to the extent that other assets in the deceased’s estate are left to lineal descendants. It seems that both a transferable NRB and RNRB would be available to the surviving spouse’s estate on death (which could total £1m); assets in the estate over £1m will be subject to IHT.