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Gifting up a Generation

How can a child gift property to their parents without causing Inheritance Tax issues further down the line?

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Published 12 January 2022

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  • Private Wealth
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  • Private Wealth

A scenario frequently encountered is where a client has accumulated significant wealth during his or her lifetime and wishes to care for elderly relatives – often parents – but without triggering IHT on their deaths. It is a particular issue when someone wants to provide his or her parents with residential accommodation.

The issue

The issue is that simple gifts by a wealthier child to his or her parents might be the worst of all worlds. This is because they would be Potentially Exempt Transfers (“PETs”) for IHT for the child, meaning that IHT would be triggered at 40% in the event of his or her own death within the following seven years. Perhaps worse still, they would also add taxable assets to the parents’ IHT estates, ensuring a further charge of 40% in the event of their deaths.

Non-solutions

Simple solutions might be thought to include making repayable loans to the parents, or making assets (such as residential property) available to them but without actually transferring the assets to them outright.

However, these apparent solutions would cause other difficulties: first, following a change in the law in 2013, any loans would need to be repaid from the parents’ estates to avoid IHT being chargeable, and funds might not be available to make the repayments. Secondly, if property is owned by a child but occupied by the parents, whilst IHT would avoided on the parents’ deaths, the acquisition would be subject to the supplemental 3% SDLT charge for second properties. Additionally, CGT – at the higher rate of 28% – would apply in due course when the property is sold, with no “main residence” relief available for the parents’ occupation.

Similarly, it has been unattractive to make lifetime trusts in most cases since a 2006 change in the law, as a 20% IHT entry charge will apply to amounts exceeding the available Nil Rate Band (typically £325,000).

The solution

In appropriate cases, it would be possible to create a new purpose-made trust with a nominal amount (£10, for example). A loan could then be made to the trustees to enable them to purchase property for the parents to use. This would have the following consequences: (1) the nominal sum creating the trust would theoretically be subject to IHT unless within the Nil Rate Band; (2) the loan to the trustees would trigger no IHT, though it would remain an asset of the child (and so be within his or her IHT estate); (3) none of the assets would be within the parents’ IHT estates; (4) no IHT periodic charges (e.g. on every 10th anniversary of the trust’s creation) would apply to the amount of the loan; (5) the parents would be able to occupy/use the property owned by the trustees; (6) the higher rate of SDLT ought not to apply to the acquisition of the property; (7) The CGT “main residence” exemption would apply in the case of residential property owned by the trustees (albeit subject to the loan) and occupied by the parents.

As a result, this solution will achieve the commercial objective of the child and his or her parents, of enabling the parents to occupy property, but without the tax disadvantages of the non-solutions referred to above.

 

Read our latest article in this series: Lifetime giving: Can I give my home to my children (and still live in it)?

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Shorter Reads

Gifting up a Generation

How can a child gift property to their parents without causing Inheritance Tax issues further down the line?

Published 12 January 2022

Associated sectors / services

Authors

A scenario frequently encountered is where a client has accumulated significant wealth during his or her lifetime and wishes to care for elderly relatives – often parents – but without triggering IHT on their deaths. It is a particular issue when someone wants to provide his or her parents with residential accommodation.

The issue

The issue is that simple gifts by a wealthier child to his or her parents might be the worst of all worlds. This is because they would be Potentially Exempt Transfers (“PETs”) for IHT for the child, meaning that IHT would be triggered at 40% in the event of his or her own death within the following seven years. Perhaps worse still, they would also add taxable assets to the parents’ IHT estates, ensuring a further charge of 40% in the event of their deaths.

Non-solutions

Simple solutions might be thought to include making repayable loans to the parents, or making assets (such as residential property) available to them but without actually transferring the assets to them outright.

However, these apparent solutions would cause other difficulties: first, following a change in the law in 2013, any loans would need to be repaid from the parents’ estates to avoid IHT being chargeable, and funds might not be available to make the repayments. Secondly, if property is owned by a child but occupied by the parents, whilst IHT would avoided on the parents’ deaths, the acquisition would be subject to the supplemental 3% SDLT charge for second properties. Additionally, CGT – at the higher rate of 28% – would apply in due course when the property is sold, with no “main residence” relief available for the parents’ occupation.

Similarly, it has been unattractive to make lifetime trusts in most cases since a 2006 change in the law, as a 20% IHT entry charge will apply to amounts exceeding the available Nil Rate Band (typically £325,000).

The solution

In appropriate cases, it would be possible to create a new purpose-made trust with a nominal amount (£10, for example). A loan could then be made to the trustees to enable them to purchase property for the parents to use. This would have the following consequences: (1) the nominal sum creating the trust would theoretically be subject to IHT unless within the Nil Rate Band; (2) the loan to the trustees would trigger no IHT, though it would remain an asset of the child (and so be within his or her IHT estate); (3) none of the assets would be within the parents’ IHT estates; (4) no IHT periodic charges (e.g. on every 10th anniversary of the trust’s creation) would apply to the amount of the loan; (5) the parents would be able to occupy/use the property owned by the trustees; (6) the higher rate of SDLT ought not to apply to the acquisition of the property; (7) The CGT “main residence” exemption would apply in the case of residential property owned by the trustees (albeit subject to the loan) and occupied by the parents.

As a result, this solution will achieve the commercial objective of the child and his or her parents, of enabling the parents to occupy property, but without the tax disadvantages of the non-solutions referred to above.

 

Read our latest article in this series: Lifetime giving: Can I give my home to my children (and still live in it)?

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