Can my widowed mother sell me her house and knock the value of my inheritance off the price?
My only surviving parent wants to sell me the family home which is worth around £150,000.
She wants to sell it to me minus the inheritance I would have received, which is a third of the rest estate.
Am I likely to encounter any roadblocks with tax? This is my first time purchase for my wife and child. AF via email
Unlocking an inheritance: Will the taxman mind if you pass on a house for less than it's worth?
Ben Smith technical advisor of Skipton financial services replies: There are a number of potential roadblocks you could encounter in a case such as this and you should seek advice from a tax specialist prior to proceeding with any arrangement.
You have not provided any details regarding your parent’s estate size however it’s important to note that IHT applies to estates in excess of the individual’s IHT threshold.
Inheritance Tax thresholds currently stand at £325,000 if you are single or divorced, or £650,000 if you are married or in a civil partnership.
As the sole survivor and a widow, your parent’s nil rate band will be up to £650,000, depending on how much allowance was used when her partner passed away.
From an Inheritance Tax (IHT) standpoint, when considering the sale of the property HM Revenue and Customs (HMRC) will be interested in the loss to the estate and not necessarily the sale value of the property.
As the sale is a ‘not at arm’s length transaction’, the difference between the market value (£150,000) and the agreed sale price between you and your parent will be treated as the loss to the estate and will therefore be deemed to be a gift from your parent to you.
This gift will be treated as a Potentially Exempt Transfer and will continue to form part of your parent’s estate for a seven-year period. The gift will reduce your parent’s available Nil Rate Band (NRB) should she pass away within seven years.
Another potential issue could arise in the event that your parent continues to live in the property following the sale.
Should this happen the gift amount could be considered a ’gift with reservation’ and therefore be void for IHT meaning that even after seven years have passed, the market value on the share of the property deemed to be gifted will form part of your parent’s estate.
If your parent does intend to continue to live in the property a gift with reservation could be avoided by your parent paying the appropriate market rent on the share of the property deemed to be gifted for as long as she continues to live there.
I have assumed from the details in the question that the family home is still occupied by your parent, however if this is not the case and the property is not her private principle residence then the sale of the property could lead to a Capital Gains Tax (CGT) charge.
Aside from IHT and CGT, while not a direct cost from taxation, it should also be noted that an independent market valuation should be sought in relation to the house to quantify the sale price which may incur additional costs and you could also encounter Stamp Duty Land Tax on a property purchase of more than £125,000.
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