Client's parents have a property worth 250,000 and very few other assets. They want to give the property to their daughter (my client) who doesn't own any other properties. They plan to carry on living there and have also asked if they do so should they pay their daughter a rent?
Must admit I can't think of any tax reasons why they should do anything. I can't see any IHT implications as the property is well below any IHT thresholds; if they carried on living there rent free it would be a gift with benefit so would stay within the estate. If they paid rent their daughter would have to pay income tax on the rent which would be pointless. There is no mortgage so no stamp duty considerations. Unless I'm missing something I can't think of any reason to do this.
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20 years ago a colleague I used to work with did a similar set up with his parents to prevent their home being sold to pay for any care his parents might need in the future. He charged them rent to live there. I've no idea if it worked or not but that was their reason for doing it.
Why not ask the client why her parents want to do this? May give us some pointers as to the intention.
Have you thought through the CGT implications? You don't say whether the daughter lives there or not.
Without a market rent being paid to the daughter this is ineffective for IHT. If a rent is paid, it will of course be taxable income for the daughter.
The care home fee angle is different. If the gift is made simply to avoid care home fees, it won't work. If, however, there is another reason, or if the gift is made many years before care home fees are in point, then it may work.
See the CRAG guidelines, although Local Authorities interpret the rules differently, and obviously Scotland is a different kettle of fish.
The reason is either that they don't understand inheritance tax or, more likely, for deprivation of assets. Given the lack, as you pointed out, of any sensible reason for them to carry this out, they will likely be caught out in any assessment, rendering the whole exercise pointless.
The other nasty is if the daughter either wants to later buy her own home or decides to move house and buy another house, extra 3% SDLT/LBTT charge would likely apply.
Other problems that might arise:
a) Subsequently parents want to borrow against the property, daughter says "bog off!".
b) Daughter (perhaps pushed by daughter's partner) starts to view the parents as having no right to the property, maybe borrows against it, defaults, reposession.
Daughter marries then either loses half of house in subsequent divorce or falls under the proverbial bus leaving parents where?
Daughter suffers insolvency event.
The list is endless.
How about the potential CGT bill for the daughter?
Seen a couple of these, no IHT bill would have arisen but the kids cop a massive CGT bill, and risk an IHT bill to due to the rent not being declared and its a GROB.
The words "own" and "goal" spring to mind.
Is the daughter in employment?
She could receive rent and pay nothing which solves all problems.
My mother left her house to my brother...but forgot to sign the will. Ooops.
He's homeless now, wandering the streets..
I had a similar case where mother "gave" her property at nil value to her two daughters and she could live in it free for her life. This was treated as a bare trust - mother received the benefit of living there and paid no rent to the daughters. HMRC accepted this as well.