Pros and cons

[Myfordman]

Swmbo and I are 64/63 and have one son of 30 still living at home with no sign of of getting married or moving out which is fine by us. We all get on well. He is is year one of a 4 year uni course after finally deciding he needs a proper career/job somewhat later in life.

In addition to our home , we have my parents house rented out and have been thinking about inheritance tax planning combined with investing some of our funds into property.


The plan is to buy a local flat in his name and rent it out. He is will not be a tax payer for a few years and the rent could be aimed towards reducing his student loan borrowings and repayments.

We do not need either the capital for the flat or the income in order to continue to live comfortably - very fortunate. :eusa-whistle:

As the property will be bought in his name, and that SWMBO and I survive a further 7 years (high probability :eusa-pray: ) this should serve to move the cost of the property from our estate into his free of IHT. Under the terms of our wills, apart from a few small legacies, the bulk of our estate will go to our son.

The conveyancing solicitor has asked if we are providing the purchase price of the flat as either a gift or a loan to our son and suggests we get independent advice and she is not prepared/able to do this.

Currently I'm thinking "gift" to provide a clean break from our estate but can't quite work out the pros and cons of making it a loan that would likely not be paid off.

One possibility could be that son will marry, then divorce. I don't know if the flat could get passed in part to the estranged wife or if it was 100% owned by my son before the marriage, it would be outside any divorce settlement.


If you have read this far and not dozed off, I'd welcome some discussion.

TIA

BTW this would be under English law

 

[Glynne]

Only part answer I'm afraid as I have just been through probate for my late Mum's estate and I did go and see a professional tax advisor for part of it.
The bit I can speak to is the gift. My Mum "gifted" her house to my sister and me in 2006 - so she survived the 7 years. It was properly recorded and registered with HM Land Registry but because we didn't charge her rent (obviously), for tax purposes it is regarding as a "gift with reservation of benefit". So despite being legally owned by my sister and myself, I had to declare it for Inheritance Tax purposes. The only way around this would have been to charge Mum rent and that has to be a commercially realistic rent rather than just a token peppercorn rent.
I'm not normally one to recommend financial advisors but in your case I would seriously think about it given the various permutations your situation could throw up.

 

[Woodchips2]

Inheritence tax can be a minefield and I'd take your solicitor's advice and get a specialist to advise you as the law stands. If you put 'Inheritence tax advice ' into your search engine you will get a lot of free information but with the possibility of getting it wrong and having to pay the Government later I'd pay for a professional to advise me who is covered by Professional Indemnity Insurance.

Regards Keith

 

[Rorschach]

What is the approx value of the estate? Your son will only pay IHT on anything over £650k, so this might affect your decisions.

 

[Alexam]

First question is how is the parents home owned at present? By you or jointly with your wife?

There is another option you may not have thought about and that is creating a Trust and gifting the property to that Trust. The same IHT 7 year rule would still apply, but management by Trustees, you, your wife, your son, with beneficiary as your son would avoid any possibility of any future spouse of your son getting hands on it. That is providing your son does not become a final beneficiary. That's another opportunity your son could have. Some tax planning would be necessary if the Trust has income, but not just growth.

Unfortunately, many of the finer points of Trust and IHT planning tend to escape the average solicitor, as well as the financial advisers who 'say' they understand IHT planning.
Malcolm

 

[DoctorWibble]

By loan I guess you mean allow your son the beneficial use of the flat whether as landlord or occupant. The difficulty is that either way you'd still own it until neither of you are able to own things anymore. At which point IHT comes into play. If on the other hand you "sell" the flat to your son but take no repayments then the date the "loan" is written off would become the date of the "gift" and so again IHT is an issue unless you formally write the loan off seven years before you die. So loaning howsoever you do it is a distraction that doesn't really get you anywhere. Outright gift is the only way I know of that would set the seven year clock ticking. It has the further advantage of protecting the value of some of your estate from care home costs which can quickly drain bigger pots than you may have.

BTW keep in mind too that so long as the flat (or your parents house) is rented any growth in value of that property is liable for CGT. This is quite distinct from IHT. The only way to avoid CGT that would be to gift it to your son outright and encourage him to move in and make the place his formal residence.

As for divorce then that is always a risk. Owning it beforehand carries weight but only if there are "surplus assets" - meaning more than sufficient to maintain both new households (ie buy two houses). That is rarely the case especially when kids are involved and bigger homes are considered a minimum requirement as well as childcare costs or non working parent etc etc. But in truth divorce is a risk you can't mitigate against anyway and will always be there whether you gift now or do something else. Even if your son was divorced before he inherited anything the value of his future inheritance can be taken into account in any settlement. More complicated measures such as creating a trust with the son as the beneficiary would perhaps only reduce your sons share of other assets in any divorce so wouldn't necessarily help. The lawyers of the truly wealthy may know ways round some of these issues but you're unlikely to find out without bunging them some money. Often the cost of avoidance measures (fees, maintenance of legal structures etc) put them outside the reach of ordinary folk and the simplest straightforward solutions are usually the best. Gifting it now is likely the best answer. But of course qualified advice is (usually) more reliable than what you'll get from an internet forum so given the amounts involved you ought to seek some out.
Cheers
Ken

 

[lurker]

Just been through my Mums probate (as the executor) so have a little knowledge

If you gift a house/money to your son, as you say it "clears" after 7 years, however for every year between now & then the taxable bit is reduced year on. Assume you can gift this jointly thus getting double relief. Inheritance tax seems fairly straight forward and unless your estate is complicated and running into millions, does not appear to "a minefield".
If you don't give your son the dosh now (and don't spend it yourselves) its going to be subject the tax anyway. So its tax efficient to give it him now. When I finally get my hands on my Mums estate (it seems to take forever!) I shall be handing over the majority to my 2 sons for this very reason.

What is a minefield giving your dosh to your kids so the council have to support you because you have so little wealth. They can look back 10 -20 years and deem you were trying to diddle them.

In your shoes, my main concern is your son shacking up with a gold digger and loosing your money in the courts when they split, quite how you avoid this I don't have a clue. If anyone knows I'd be glad to hear as i share your concerns regarding my two. Other than trusting luck, I don't think there is much that can be done

 

[DoctorWibble]

Only part answer I'm afraid as I have just been through probate for my late Mum's estate and I did go and see a professional tax advisor for part of it.
The bit I can speak to is the gift. My Mum "gifted" her house to my sister and me in 2006 - so she survived the 7 years. It was properly recorded and registered with HM Land Registry but because we didn't charge her rent (obviously), for tax purposes it is regarding as a "gift with reservation of benefit". So despite being legally owned by my sister and myself, I had to declare it for Inheritance Tax purposes. The only way around this would have been to charge Mum rent and that has to be a commercially realistic rent rather than just a token peppercorn rent.
I'm not normally one to recommend financial advisors but in your case I would seriously think about it given the various permutations your situation could throw up.

Glynne is quite right which is why gifting for most people doesn't really work. But in myfordmans case he's talking about gifting only a second property so providing he keeps sweet with mrsmyfordman and is not forced to move in to the flat as a tenant he'll avoid the problems Glynne describes. And providing of course he doesn't take any share of his sons rent.

 

[Myfordman]

Thanks for the very useful comments so far.
Trying to answer some of the point you have asked.
1. My parents home is jointly own by myself and my wife.
2. The flat purchase value is around 6-7% of our total assets and so should not raise an issue with the LA care people.
3. The estate value as it stands is more than three times the joint IHT allowance so I feel I have to do something to pass on as much as possible of my hard earned in the way I want to.

I'm glad to have it confirmed that gifting is the way to go for IHT purposes and tend to agree that it is very difficult to mitigate against nightmare divorce settlements.

I feel that it is probably an acceptable risk that our son might lose part of the value of this gift IF there is a messy divorce given the relatively small proportion that it represents compared to the total estate.

 

[Matt@]

buy a house not a flat ie you own the freehold and dont have service charges and potentially open ended repair bills....

 

[Alexam]

Hope you are using you full gifting allowances each year, even if you gift to a Trust for your son, it's best to get rid of the £3000 each you both have every tax year.
Malcolm

 

[williams1185]

i had an experience with a former girl friend many years ago my father gifted me a piece of land on which i built a house with a mortgage upon speaking to his solicitor about this he suggested placing a second charge upon the property which effectively left no value or very little left in the event of a split which did happen , later on the debt was left cleared on paper but the clever part was even though it had been cleared before i later married i still had that in my name so it could be taken out of any divorce settlement before a fifty fifty split . so i would suggest speaking to a solicitor first before anything else .cheers ian

 

[Alexam]

Be very careful with charges, unless they are taken out by a Trust. If the charge were say on the sons property in favour of the parent, then it is an asset of the parent. A good STEP solicitor would be aware of this.
Malcolm