The Lemon Fool

My daughter in law, who has power of attorney over her step father, has been offered his house as a gift. She is keen to accept it but wonders what potential taxation implications might arise in the future.

He is 83 years old and would continue to live in the house, up until he either needed care or passed away.

His total estate is probably £500k, £450k for the house and the rest in premium bonds/cash.

The questions that have arisen are:-

1. If at a future date the house is sold would there be a tax charge on the sale?

2. If care home fees exceeded his pension/cash reserves could a demand be made against the value of the property?

This might be more complicated than I am aware of so I would appreciate any information that I can pass on to my daughter in law.

Thank you, Paul

Hopefully someone more knowledgeable will come along, but if it's somehow urgent...

If he lives in the house rent-free it has not been gifted. She will need to charge him a commercial rent.

He can give away £3,000 a year without it counting for IHT, either to her or to her and others, up to £3,000 per annum in all.
Over and above that, the house or the proceeds if sold, will be subject to IHT if he dies within seven years. Taper relief may apply within that period, see here
https://www.gov.uk/inheritance-tax/gifts... scroll down....

If he dies within seven years of the gift, whether or not she has sold the house she will be liable for the IHT unless there are sufficient funds within his remaining estate.

The value at the point of gifting should be properly established. I am not sure what counts as 'properly'.

V8

Paultry wrote:My daughter in law, who has power of attorney over her step father, has been offered his house as a gift. She is keen to accept it but wonders what potential taxation implications might arise in the future.

He is 83 years old and would continue to live in the house, up until he either needed care or passed away.

His total estate is probably £500k, £450k for the house and the rest in premium bonds/cash.

The questions that have arisen are:-

1. If at a future date the house is sold would there be a tax charge on the sale?

Potentially, yes. At present a sale (or gift) would be exempt from CGT, but the DIL would be liable to CGT when she sold it, based on the difference between its value at the date of the gift and the sale price. For that reason it'd be sensible to get a (preferably optimistic!) valuation from a Chartered Surveyor.

2. If care home fees exceeded his pension/cash reserves could a demand be made against the value of the property?

Yes, if the local authority took the view that he had given the house away in order to make himself eligible for benefits. This is known as deliberate deprivation, and ultimately the LA can go to court for an order that the DIL return the house to him. the smaller the gap between the gift and the claim for benefits the higher the risk. His state of health would also be a highly material factor.

This is a particular risk in view of his advanced age and that he seems to have little other than the house in his estate.

However, it's him who should be worried more than her. I often get asked about this and cite the three D's as specific risks, death, debt and divorce.

The death risk is that having received the gift she unexpectedly dies, and as the house would form part of her estate the beneficiaries would probably want him out, so the house could be sold.

The debt risk is that she becomes insolvent, so that the house is seized by her creditors

The divorce risk is that she gets divorced, her husband is awarded half the value of the house, and the only way she can raise the cash is by selling the house.

In all of these scenarios he may find himself on the streets.

Although there are various mechanisms to try and avoid this happening none of them is entirely without risk. For both his and her protection she must therefore insist that he obtain independent legal advice before proceeding.

On the first question:

1. If at a future date the house is sold would there be a tax charge on the sale?

I agree with Clitheroekid on the CGT implications. For IHT it sounds as if he will reserve a benefit by continuing to live in the property (and this will avoid any pre-owned asset charge). But if he either dies whilst residing in the house or within 7 years of ceasing to live there (a date that would be later than the gift) then his estate would be liable to IHT on a failed Potentially Exempt Transfer. Although, as 88V8 has helpfully noted, there is a taper note that this applies to the rate of tax and not to the value of the transfer (and so the taper is worth considerable less than you might imagine).

Eb.

88V8 wrote:Hopefully someone more knowledgeable will come along, but if it's somehow urgent...

If he lives in the house rent-free it has not been gifted. She will need to charge him a commercial rent.

V8

which she could of course give back to him every month in cash?

It cant be that simple surely though!

didds

88V8 wrote:If he dies within seven years of the gift, whether or not she has sold the house she will be liable for the IHT unless there are sufficient funds within his remaining estate.

But hang on. There is no IHT. A total estate of £500k is exactly the current threshold of IHT (including house to step child), so AT THE MOMENT there is no relevance of IHT and PETs here.
https://www.gov.uk/inheritance-tax
I accept a house could easily rise in value above the IHT threshold by the time he dies, or his estate be diminished by care costs.

There is no CGT on a first home. So CGT becomes relevant if she doesn't live in the house. She could mitigate that by moving in. Would she do that after he left or does she own another property? As it stands at the moment, it would actually be better NOT to change the ownership of the house. Because he is not liable for CGT (in first home) and she could be.

Sounds to me that with deliberate deprivation rules, CK's 3Ds, and the IHT/ CGT position, there is CURRENTLY very little benefit and considerable risk in gifting the house right now. If the house value were to increase substantially above the IHT threshold then the IHT/PET position could become significant. But right now, there's very little for either party to gain and plenty to lose by gifting immediately.

Gryff

Paultry wrote:My daughter in law, who has power of attorney over her step father, has been offered his house as a gift. She is keen to accept it but wonders what potential taxation implications might arise in the future.

He is 83 years old and would continue to live in the house, up until he either needed care or passed away.

His total estate is probably £500k, £450k for the house and the rest in premium bonds/cash.

The questions that have arisen are:-

1. If at a future date the house is sold would there be a tax charge on the sale?

2. If care home fees exceeded his pension/cash reserves could a demand be made against the value of the property?

This might be more complicated than I am aware of so I would appreciate any information that I can pass on to my daughter in law.

Thank you, Paul

People using power of attorney should be careful about making gifts. May not apply to your circs, but just mentioning it in case it's relevant. IANAL.

yorkshirelad1 wrote:

Paultry wrote:My daughter in law, who has power of attorney over her step father, has been offered his house as a gift. She is keen to accept it but wonders what potential taxation implications might arise in the future.

He is 83 years old and would continue to live in the house, up until he either needed care or passed away.

His total estate is probably £500k, £450k for the house and the rest in premium bonds/cash.

The questions that have arisen are:-

1. If at a future date the house is sold would there be a tax charge on the sale?

2. If care home fees exceeded his pension/cash reserves could a demand be made against the value of the property?

This might be more complicated than I am aware of so I would appreciate any information that I can pass on to my daughter in law.

Thank you, Paul

People using power of attorney should be careful about making gifts. May not apply to your circs, but just mentioning it in case it's relevant. IANAL.

I wondered why the POA should be relevant. She certainly should not be making the gift to herself from the step father's estate. There is a clear conflict of interest but had that been a legal impediment, presumably CK would have said so. Quite apart from all the other issues, this seems to me to be an important one. Is the step father of sound mind to make the gift? Even were she to be entirely innocent in all of this, there seem to me to be too many other factors involved. Why does the stepfather not just leave the property in his Will?

Dod

Dod101 wrote:

yorkshirelad1 wrote:People using power of attorney should be careful about making gifts. May not apply to your circs, but just mentioning it in case it's relevant. IANAL.

I wondered why the POA should be relevant. She certainly should not be making the gift to herself from the step father's estate. There is a clear conflict of interest but had that been a legal impediment, presumably CK would have said so. Quite apart from all the other issues, this seems to me to be an important one. Is the step father of sound mind to make the gift? Even were she to be entirely innocent in all of this, there seem to me to be too many other factors involved. Why does the stepfather not just leave the property in his Will?

It is perfectly legal for an attorney to make a gift either to herself or to a third party. She merely needs to be able to demonstrate that it would have been reasonably in the interests of the step father, i.e. it is something that the step father might/would have done anyway had he been capable. For instance it might be the continuation of an established pattern of annual gift-making.

The gift has to be in good faith of course. The best situation would be where the attorney was also the executor of the step father's will and the sole beneficiary. In that case she is merely accelerating what would have become hers anyway. Moreover doing that might remove the need for probate later. I did something rather similar with my mother where, in her later days, I acted as an attorney to donate certain assets to myself both for ease of management and in order to reduce the tasks that would be needed in probate.

Obviously there might have been a problem had I pre-deceased my mother, as CK noted, but at that point in time that was very unlikely.

Lootman wrote:

Dod101 wrote:

yorkshirelad1 wrote:People using power of attorney should be careful about making gifts. May not apply to your circs, but just mentioning it in case it's relevant. IANAL.

I wondered why the POA should be relevant. She certainly should not be making the gift to herself from the step father's estate. There is a clear conflict of interest but had that been a legal impediment, presumably CK would have said so. Quite apart from all the other issues, this seems to me to be an important one. Is the step father of sound mind to make the gift? Even were she to be entirely innocent in all of this, there seem to me to be too many other factors involved. Why does the stepfather not just leave the property in his Will?

It is perfectly legal for an attorney to make a gift either to herself or to a third party. She merely needs to be able to demonstrate that it would have been reasonably in the interests of the step father, i.e. it is something that the step father might/would have done anyway had he been capable. For instance it might be the continuation of an established pattern of annual gift-making.

The gift has to be in good faith of course. The best situation would be where the attorney was also the executor of the step father's will and the sole beneficiary. In that case she is merely accelerating what would have become hers anyway. Moreover doing that might remove the need for probate later. I did something rather similar with my mother where, in her later days, I acted as an attorney to donate certain assets to myself both for ease of management and in order to reduce the tasks that would be needed in probate.

Obviously there might have been a problem had I pre-deceased my mother, as CK noted, but at that point in time that was very unlikely.

I think in Loot's case there is the close ties involved with the POA, Executor and beneficiary in the Will. If all of these factors are present then that improves the situation but then there is the possible deprivation of the assets if the step father has to go into a home. Were I the step daughter I would be very careful about it. Anyway the OP said that the Daughter in law 'has been offered the house as a gift'. That may change the picture.

Before my first wife died I should have done something similar but it just did not feel right to me at the time.

Dod

Lootman wrote:It is perfectly legal for an attorney to make a gift either to herself or to a third party. She merely needs to be able to demonstrate that it would have been reasonably in the interests of the step father

...

I did something rather similar with my mother where, in her later days, I acted as an attorney to donate certain assets to myself both for ease of management and in order to reduce the tasks that would be needed in probate.

Those justifications seem to be in your interests rather than your mother's.

Scott.

swill453 wrote:

Lootman wrote:It is perfectly legal for an attorney to make a gift either to herself or to a third party. She merely needs to be able to demonstrate that it would have been reasonably in the interests of the step father

...

I did something rather similar with my mother where, in her later days, I acted as an attorney to donate certain assets to myself both for ease of management and in order to reduce the tasks that would be needed in probate.

Those justifications seem to be in your interests rather than your mother's.

You don't know enough to make an assessment either way. But my main point was that it made no difference to the disposition of the assets, which remained fully available for her care and wellbeing until she died. It was not like I frittered it away, or even that I needed the money.

As an added benefit it did reduce my workload both before and after her death. Knowing her as I did, she never wanted to be a burden on others.

Lootman wrote:

swill453 wrote:

Lootman wrote:It is perfectly legal for an attorney to make a gift either to herself or to a third party. She merely needs to be able to demonstrate that it would have been reasonably in the interests of the step father

...

I did something rather similar with my mother where, in her later days, I acted as an attorney to donate certain assets to myself both for ease of management and in order to reduce the tasks that would be needed in probate.

Those justifications seem to be in your interests rather than your mother's.

You don't know enough to make an assessment either way.

I didn't make an assessment in any way. I made a comment about your statement, which appears to contradict the earlier one. You may have omitted details (which is your right, of course).

Scott.

swill453 wrote:

Lootman wrote:

swill453 wrote:Those justifications seem to be in your interests rather than your mother's.

You don't know enough to make an assessment either way.

I didn't make an assessment in any way. I made a comment about your statement, which appears to contradict the earlier one. You may have omitted details (which is your right, of course).

I gave that merely as an example of how an attorney may make transfers of assets and stay within the guidelines for doing that, since some doubt was raised about the legitimacy of so doing. I always felt comfortable that I could justify my actions and there were no problems arising.

Lootman wrote:I gave that merely as an example of how an attorney may make transfers of assets and stay within the guidelines for doing that, since some doubt was raised about the legitimacy of so doing. I always felt comfortable that I could justify my actions and there were no problems arising.

Keeping it hypothetical, if an attorney gifted themselves any assets, then were to subsequently die or go bankrupt before the death of the original owner, a whole can of worms would be opened.

The fact that such actions aren't generally scrutinised is beside the point, the risk is there.

Scott.

Thank you all so much for the information in answer to my questions. It is definitely more involved than I had first thought.

I should add some more detail to the situation that has recently arisen and why the idea of gifting the house came about.

Daughter in law's mum recently passed away, funeral today in fact. The step father already has a will prepared, in which he leaves everything to his step daughter. But the recent trauma has propelled him into wanting to make absolutely sure that she really inherits his estate, I do not believe his motivation is to avoid potentially onerous care home fees.

What worries him more is that in a previous marriage, long since dissolved, he had a daughter. He has not seen her in years and never had anything to do with her but he is now fearful that on his demise she may come looking for part of the inheritance.

My inclination (gleaned from all of your excellent suggestions/discussions) is that he should not gift his house, but rather redraft his will still leaving everything to his daughter in law. But there should be specific instructions that his biological daughter, and even grandchildren, are excluded from his estate. I'm not sure if this is possible, but if it were, the step father could rest easily knowing his wishes would be followed.

Paul

Paultry wrote:But there should be specific instructions that his biological daughter, and even grandchildren, are excluded from his estate. I'm not sure if this is possible, but if it were, the step father could rest easily knowing his wishes would be followed.

No problem. Unlike some other countries, UK has no automatic rights of inheritance for offspring, unless they are "dependants", which is clearly not the case here. He can leave his money to who he chooses.

If you suspect such a challenge, then it is wise to word the will to specifically exclude it. And, goes without saying, to ensure it is drafted by a proper professional rather than homemade or an online service. A few pounds spent now could save thousands later. Also, if he can meet and talk to the solicitor and express his wishes, then the solicitor is also a witness to his competence, and the fact he wasn't acting "under duress".

Gryff

gryffron wrote: UK has no automatic rights of inheritance for offspring,

England has no automatic rights of inheritance for offspring, But in this instance it wouldn't matter in Scotland, because the house is heritable property, and he can do what he likes.

Moderator Message:
Fixed the quotes for you

swill453 wrote:

Lootman wrote:I gave that merely as an example of how an attorney may make transfers of assets and stay within the guidelines for doing that, since some doubt was raised about the legitimacy of so doing. I always felt comfortable that I could justify my actions and there were no problems arising.

Keeping it hypothetical, if an attorney gifted themselves any assets, then were to subsequently die or go bankrupt before the death of the original owner, a whole can of worms would be opened.

The fact that such actions aren't generally scrutinised is beside the point, the risk is there.

Yes, CK already outlined the risks of doing something like this. However there may be situations where those risks are worth taking.

I thought I ought to return to the thread to let you all know of the outcome of the situation.

Briefly, the house remained in the step-father's name. The will was rewritten to benefit his step daughter exclusively.

Sadly, the step father died quite recently, having survived two years beyond his wife's demise.

All the legal work is proceeding and hopefully probate will be completed within a few weeks.

It is a real joy to obtain the advice and guidance from people such as yourselves, thank you all. Paul