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Helping Parents Downsize
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Helping Parents Downsize
I have older parents who we want to help downsize and move close to where we live (London). Currently they have about 200k equity in their property but the cost of the London replacement would be, say, c 800k. One option for us would be to buy a flat and rent it to them, the flat eventually being for our kids. Downside clearly second home stamp duty. A seemingly better option is to loan them 600k interest-free, and then they buy the property in their name as Main Residence, with the 200k as equity. It seems unlikely that the value of their estate would exceed the nil band for IHT purposes.
Any pitfalls with this idea? I thought also to add in a 50/50 profit share in the event of gains on early sale as recompense for the interest free loan. If this we then taxed as a capital gain for us would be beneficial.
Any help appreciated!
b2b
Any pitfalls with this idea? I thought also to add in a 50/50 profit share in the event of gains on early sale as recompense for the interest free loan. If this we then taxed as a capital gain for us would be beneficial.
Any help appreciated!
b2b
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Re: Helping Parents Downsize
BackToBlack wrote:I have older parents who we want to help downsize and move close to where we live (London). Currently they have about 200k equity in their property but the cost of the London replacement would be, say, c 800k. One option for us would be to buy a flat and rent it to them, the flat eventually being for our kids. Downside clearly second home stamp duty.]
A seemingly better option is to loan them 600k interest-free, and then they buy the property in their name as Main Residence, with the 200k as equity. It seems unlikely that the value of their estate would exceed the nil band for IHT purposes.
I wonder whether HMRC might view an interest-free loan as a form of income for your parents, and therefore a liability arises for income tax on the value of that saving? While if they paid you market-rate interest than that is taxable income for you?
I had the same concern when I was considering lending money to my children to buy their first home. In the end I just made them gifts, but that won't work in your case because that would drive the value of your parents' estate over the IHT nil rate band. (Or not, with the new million pound allowance?)
Are your children adults? If so then you could do something similar - gift them the money to buy the flat to avoid the extra stamp duty.
If that's too complicated I might just pay the extra stamp duty. Annoying but not fatal.
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Re: Helping Parents Downsize
BackToBlack wrote:... I thought also to add in a 50/50 profit share in the event of gains on early sale as recompense for the interest free loan. If this we then taxed as a capital gain for us would be beneficial.
You'd have no equity in the property yet potentially receive something. Smells like interest to me, however described.
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Re: Helping Parents Downsize
Thanks for the comments. The idea of providing debt with zero interest but with some upside sharing element was indeed geared towards trying to avoid doing something "off market" (although I don't know exactly what the tax consequences of this are). In this interest rate environment, it seems like a reasonable debt investment to me. Doesn't really matter if the gains on sale are capital or interest ultimately, although they will clearly come in one lump (if they come) and I don't see how you presume house prices are going up.
Making a gift seems a little tricky....I'm they wont change their will...but....
b2b
Making a gift seems a little tricky....I'm they wont change their will...but....
b2b
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Re: Helping Parents Downsize
BackToBlack wrote:... A seemingly better option is to loan them 600k interest-free, and then they buy the property in their name as Main Residence, with the 200k as equity. It seems unlikely that the value of their estate would exceed the nil band for IHT purposes.
I've just spotted your further post but wrote this before your reply.
There were plenty of threads on this over at TMF*** but, from memory, you should bear in mind the following:
1. Any interest free loan should be properly documented and should be repayable on demand.
2. Although the loan itself should not have an IHT or Income Tax impact, the interest foregone may have IHT implications for you:
https://www.gov.uk/hmrc-internal-manual ... /ihtm14317 includes (my bold):
Lifetime transfers: gifts with reservation (GWRs): the gift: interest free loans
The grant of an interest free loan repayable on demand
is not a transfer of value (because the value of the right to repayment of the loan is equal to the amount of it)
but it is a gift because there is a clear intention to confer bounty: the property disposed of is the interest foregone.
But, the grant of such a loan is not, in itself, a GWR.
*** Here is one of them which is worth a study http://boards.fool.co.uk/is-this-totall ... sort=whole (which I've saved here https://web.archive.org/web/20170106143 ... sort=whole)
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Re: Helping Parents Downsize
BackToBlack wrote:Any pitfalls with this idea? I thought also to add in a 50/50 profit share in the event of gains on early sale as recompense for the interest free loan. If this we then taxed as a capital gain for us would be beneficial.
Not an area I know a great deal about, but I would check up on the implications for this idea for the second-home stamp duty. Basically, I find it difficult to believe that it is quite that easy to put oneself in a position to benefit from capital gains on a second property but not be liable to pay the extra stamp duty - and if it were that easy, I would expect to have seen all sorts of schemes to exploit the loophole by now! (And proposed anti-avoidance measures as well, for that matter...)
Gengulphus
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Re: Helping Parents Downsize
Gengulphus wrote: I would check up on the implications for this idea for the second-home stamp duty. Basically, I find it difficult to believe that it is quite that easy to put oneself in a position to benefit from capital gains on a second property but not be liable to pay the extra stamp duty
Agreed, I think any such 50/50 deal would have to be a very loose, private and informal arrangement between the parties to share any eventual profit.
So if I give you 500K to buy a house and, ten years later you sell it for a million, then all those proceeds would go to you. You could then "gift" me the 250K half share of the profit if you choose to and want to express your gratitude for my generosity, but I could not hold you to that if you decided not to.
And even then if someone looked at the sequence of cash-flows they might infer they were all part of an implied contract, and then I might even end up being liable for CGT. So it would be important to document both gifts as being unconditional and unrelated.
If, as in this case, I was due to inherit your estate upon your death anyway, then I would simply make a gift and leave it at that, because I'd be getting that profit eventually anyway (IHT aside where relevant). And not even have the 50/50 deal as a "nod and a wink" thing.
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Re: Helping Parents Downsize
It is likely that the interest foregone might be construed as a 'gift' for IHT purposes as pinkdalek suggested, but as it is almost by definition a gift that qualifies as regular (as the interest would be if paid) and a gift that is made out of income (assuming the parents are able to cover their living expenses with their actual income), it is likely to qualify for the 'gifts out of income' IHT exemption and so not result in any IHT consequences.
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Re: Helping Parents Downsize
scrumpyjack wrote:It is likely that the interest foregone might be construed as a 'gift' for IHT purposes as pinkdalek suggested, but as it is almost by definition a gift that qualifies as regular (as the interest would be if paid) and a gift that is made out of income (assuming the parents are able to cover their living expenses with their actual income), it is likely to qualify for the 'gifts out of income' IHT exemption and so not result in any IHT consequences.
There was an interesting discussion on this in the link I provided earlier:
https://web.archive.org/web/20170106143 ... sort=whole
It took me some time to understand but I followed what Gengulphus was saying over there, which I won't attempt to summarise here at the risk of misquoting.
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Re: Helping Parents Downsize
Thanks, I have now read that. The HMRC IHT notes say that 'income' for the purposes of saying a gift was made out of income is not necessarily the same as income for tax purposes, so there is a reasonable argument for saying there would be no income tax consequence of 'notional' interest and it would be probably be possible to use the gifts out of income exemption if need be. Nowhere in the IHT notes could I see anything about having to declare notional interest on an interest fee loan. It is only mentioned in the context of whether such a loan is a gift with reservation, which it is not.
I think, as executor, I would take the line that nothing in this respect is declarable other than the debt owed to the estate in respect of the capital loaned. If the Revenue choose to challenge that, so be it.
My only experience in practice of this issue is the other way round - I and my siblings paid my mother a quarterly amount for many years as an interest bearing loan. There was a properly drawn up legal document for the arrangement and on her death many years later the capital and accumulated interest were repayable to us out of the estate and were an allowable deduction for IHT. We of course had to pay income tax on the interest at that point. It all worked fine with no problems or query from the Revenue and saved quite a bit of IHT, whilst ensuring our mother had a very comfortable 'income' in her retirement. She had not given us any assets previously so no question of a 'gift with reservation' arose.
I think, as executor, I would take the line that nothing in this respect is declarable other than the debt owed to the estate in respect of the capital loaned. If the Revenue choose to challenge that, so be it.
My only experience in practice of this issue is the other way round - I and my siblings paid my mother a quarterly amount for many years as an interest bearing loan. There was a properly drawn up legal document for the arrangement and on her death many years later the capital and accumulated interest were repayable to us out of the estate and were an allowable deduction for IHT. We of course had to pay income tax on the interest at that point. It all worked fine with no problems or query from the Revenue and saved quite a bit of IHT, whilst ensuring our mother had a very comfortable 'income' in her retirement. She had not given us any assets previously so no question of a 'gift with reservation' arose.
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