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Gift of home to reclaim SDLT

Is there some trap I'm missing?

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Hi all

So a client has a home and is about to buy a new home.  They have been trying to sell home 1 for some time but struggling, so rather than losing home 2 they are just buying it (they are financially independent). 

They have asked me if they can simply gift home 1 to their son to either avoid or reclaim the 3% extra SDLT they would/will have paid on acquiring home 2.  This seems too good to be true (as, although it isn't the plan, the house could then be re-gifted to them at a later date, meaning no CGT (unless the market seriously booms!) and no SDLT extra charge), but I can't see the flaw in the plan.  The son will then rent the property out and pass the rent to the parents.

As I see it:

- Gift to family member, so at MV, but PPR takes care of any gain.

- Mortgage free, so no SDLT on transfer.

- Potential IHT issue if client dies within 7 years of gift, but not expected.

- Rent passing to parents will again be a potential IHT issue, but unlikely (bar accident).

Only wrinkle I can see is the son can then no longer move house, as then THEY will be pay the extra 3%.  But they could avoid that by just passing the property back (CGT costs permitting).

This isn't an area I have much experience in, so any comments welcomed.

Replies (13)

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By paul.benny
14th Sep 2020 16:59

1) Do they still intend to sell house 1? There is a 36 month window for reclaim of SLDT.

2) The trouble with gifts is the recipient then thinks the property is theirs. Even though parent and son are on good terms now, money can corrupt and he might not want to give it back later. Or he might borrow against the house. Or not hand over the rent.

3) Who would have the tax liability on the rent if son is the person letting but is not retaining the income?

Sounds like lot of faff and risk to avoid a tax which could potentially be reclaimed.

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Replying to paul.benny:
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By Dr Gonzo
15th Sep 2020 11:35

2) The trouble with gifts is the recipient then thinks the property is theirs. Even though parent and son are on good terms now, money can corrupt and he might not want to give it back later. Or he might borrow against the house. Or not hand over the rent.

No, if it is a gift the property is theirs, otherwise it is not a gift. He can do what he likes with it.

3) Who would have the tax liability on the rent if son is the person letting but is not retaining the income?

The son would have the liability, regardless if he passed the rent on or not. In an outright sale or gift of property, beneficial ownership follows legal ownership, unless there is something to counter this such as a deed of trust. Any such deed would make it clear it was not a gift.

Depending on how long the property is held for and the eventual selling price there may also be a gain taxable on the son unless he makes it his PPR, though his annual allowance may well cover this. It may also affect any future property purchases for the son in that he may not qualify for first time buyer incentives.

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By Duhamel
14th Sep 2020 17:17

I would have concerns that its not really a gift if the son isn't keeping the income. I'm sure Justin will pop up any second to disagree, but it doesn't pass the smell test.

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By Paul Crowley
14th Sep 2020 17:31

Is son married?
Is son in business?

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David Winch
By David Winch
14th Sep 2020 18:28

In my line of work (dealing with people who are, in the most part, facing significant criminal charges or already convicted) 'gifts' are a nightmare (even gifts made years ago).
It could be a tad embarrassing asking the client if he or spouse or son have any plans to get convicted of anything in the next few years! (But if anyone does - avoid gifts made or received.)
David

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Replying to davidwinch:
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By Justin Bryant
15th Sep 2020 13:35

But that is probably a biased view assuming you often deal with criminal stuff. Also, here is a gift that backfired under asset protection planning for the donor but helped the innocent donee (so it depends who benefits from the messed up gift planning).
https://www.accountingweb.co.uk/any-answers/interesting-ated-bo-case

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By Adam12345
14th Sep 2020 21:10

If rent is paid back to parents, then would remain beneficial owners. Therefore, it is not really a gift from a tax perspective in my opinion.

Also, GWROB for IHT.

Drop house price by a percentage of the SDLT saving.

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Quack
By Constantly Confused
15th Sep 2020 09:50

Hi all

Thanks for your thoughts.

The impression I get (and intend to confirm) is that they have given in trying to sell property 1 and just decided to give it to the son as a 'better than leaving it empty and footing the 3%' stance.

I'm curious David, what happens if the son offs someone and goes to prison? Presumably no harm comes to the parents, other than their son no longer being able to gift the property back?

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Replying to Constantly Confused:
By Duggimon
15th Sep 2020 10:01

David will know better than me but I think in some cases, the assets of criminals may be forfeited under the Proceeds of Crime Act.

The parents might gift the house to the son, make it all nice and legal (though I'm not convinced it is if they retain legal entitlement to the rent), then lose their house.

The point above about whether the son is married is also relevant, if he is then the house could be lost in divorce proceedings.

Best not to assume everything will automatically be fine because it's family, imo, only do the gift if it makes sense long term, I don't agree saving the 3% SDLT is a good reason for this somewhat fake construct.

Does it not fall foul of the GAAR somewhere, given that what you outline in your post is by definition a load of manoeuvring for the sole purpose of avoiding tax?

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Replying to Constantly Confused:
David Winch
By David Winch
15th Sep 2020 10:27

Since you ask, offing someone is not usually a problem but say, tax evasion or drug trafficking or selling counterfeit trainers, could be very serious.
Let's assume Dad is into a bit of crime, gets convicted & is subject to confiscation under PoCA 2002. Then the current value of the asset he has gifted could (largely depending upon the date of the gift) be treated for confiscation purposes as still his. This increases his 'available amount' for confiscation.
Alternatively, if the son is, say, growing & selling cannabis then he (if convicted of, say, possession of a controlled drug with intent to supply) could be subject to confiscation and his 'available amount' will include the current value of the property (because he owns it).
Confiscation is deliberately draconian legislation (drawn up by lawyers, not accountants).
David

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By Justin Bryant
15th Sep 2020 13:35

There were two recent highly argumentative threads on this planning ,where the only potential downside risk (apart from IHT re sudden deaths and assuming implemented correctly) is the SDLT exchange rules. Simpler to ignore DW crime comments above assuming implemented correctly.

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Replying to Justin Bryant:
Quack
By Constantly Confused
15th Sep 2020 15:49

Justin Bryant wrote:

Simpler to ignore DW crime comments above assuming implemented correctly.

I don't think I could ever ignore anything David says...

Especially as he kindly used my phrasing when he responded :)

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Replying to Constantly Confused:
Psycho
By Wilson Philips
15th Sep 2020 16:05

Agreed - David is one of the most knowledgeable, polite and coherent members of this community. He is one of the few members left whose comments I would accept without feeling the constant need to fact-check them.

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