PThomas Posted November 28, 2006 Report Share Posted November 28, 2006 Please bear with me as this is likely to be a long post... I am writing on behalf of my Mother-In-Law (MIL), she owns a 2nd house (Bungalow) that is occupied by her MIL and new Husband. This has been the case for some 20+ years when my Father-In-Law(FIL) paid off the remaining mortgage for his Mother. There is a written (Legal) agreement that they may live there until either both have passed away or are in a Nursing home. At that point the property is to be sold with my MIL's MIL estate getting £x amount of the proceeds. Unfortunately my FIL dies a couple of years ago, since then the MIL's MIL has started paying a nominal £52 per annum rent through there solicitor to my MIL. Does this now mean that my MIL is a Landlord for the propertyand has legal obligations to both maintain the property and perform annual Gas and regular electrical safety checks? Apparently there is a document agreeing that my MIL/FIL would maintain the outside of the property and the MIL's MIL would look after the inside, I will try and see this tonight. Any advice on other things she may now be responsible for? Link to comment Share on other sites More sharing options...
plym77 Posted November 28, 2006 Report Share Posted November 28, 2006 Hi PThomas Whilst I think your queries are more weighted towards 'responsibilities' and I am sure that there are users on the forum who can advise on this, I read you post with some interest as there are some substantial tax implications that you may not be aware of. For example, and bear in mind I only have the facts from your post, it would appear that the 'legal document' granted a Lease for Life to your MIL's MIL, and as such for IHT PURPOSES ONLY creates a Settlement. This has significant IHT implications for MIL's MIL in that it would seem that the value of the WHOLE property would form part of her IHT Estate. These days properties are worth a significant amount, and ultimately it is very possible that the provision of the property for life has pushed her in to IHT bands and ultimately IHT could be payable - EVEN THOUGH it is actually MIL, not MIL's MIL property. I would therefore suggest that the document and possible planning ideas are considered. It is also important to note that whilst the provision of the property creates a Settlement for IHT purposes, it does not afford the same description for CGT purposes, and as such, your MIL could be subject to a quite hefty CGT bill on future sale. There is however, some little know tax law that could work to your MIL's advantage, however, if the tax law in question could be applicable to your MIL, your MIL's MIL will need to stop paying the nominal rent. Whether it is applicable will depend on the individual facts. I would suggest that this situation is reviewed in detail. I am a Chartered Tax Adviser and Property Tax Specialist and can offer a competative quote to perform a property review and/or IHT review for you should you so wish. Please feel free to contact me on sherena.glanton@horwath.co.uk Regards Sherena Link to comment Share on other sites More sharing options...
PThomas Posted November 28, 2006 Author Report Share Posted November 28, 2006 Hi PThomas Whilst I think your queries are more weighted towards 'responsibilities' and I am sure that there are users on the forum who can advise on this, I read you post with some interest as there are some substantial tax implications that you may not be aware of. For example, and bear in mind I only have the facts from your post, it would appear that the 'legal document' granted a Lease for Life to your MIL's MIL, and as such for IHT PURPOSES ONLY creates a Settlement. This has significant IHT implications for MIL's MIL in that it would seem that the value of the WHOLE property would form part of her IHT Estate. These days properties are worth a significant amount, and ultimately it is very possible that the provision of the property for life has pushed her in to IHT bands and ultimately IHT could be payable - EVEN THOUGH it is actually MIL, not MIL's MIL property. I would therefore suggest that the document and possible planning ideas are considered. It is also important to note that whilst the provision of the property creates a Settlement for IHT purposes, it does not afford the same description for CGT purposes, and as such, your MIL could be subject to a quite hefty CGT bill on future sale. There is however, some little know tax law that could work to your MIL's advantage, however, if the tax law in question could be applicable to your MIL, your MIL's MIL will need to stop paying the nominal rent. Whether it is applicable will depend on the individual facts. I would suggest that this situation is reviewed in detail. I am a Chartered Tax Adviser and Property Tax Specialist and can offer a competative quote to perform a property review and/or IHT review for you should you so wish. Please feel free to contact me on sherena.glanton@horwath.co.uk Regards Sherena Thanks for your reply. My MIL has never worked and is now above retirement age. As I understand it she will probably have to pay 10% of the CGT value, which if the property sold for £200k, with 35k going to the MIL's MIL, 5k for refurb work, 1k for solicitors and 4k to Estate agents. Bungalow has been owned for over 10years. Unused personal allowance of £8,800 and for example an original purchase price of 70k would leave her liable to pay:- 120k @ 60% = 72k, minus allowance leaves 63,200 to pay 10% tax on = £6,320. Does that sound about right? What is IHT? Link to comment Share on other sites More sharing options...
plym77 Posted November 28, 2006 Report Share Posted November 28, 2006 Hi again You are sort of on the right track, however, the 10% tax everyone talks about is more to do with business assets held for 2 years and sold by a higher rate tax payer. Assuming that CGT is fully payable, then there may be some indexation relief available too (if owned pre 1998), plus it may be possible to uplift the original value if owned pre 82. However, assuming that these are not available and that any income (including state pension) is within the personal allowance, then the tax is more like £18 - £19k. There are ways of reducing this with a little forward planning, however, like I said in my first email, it may be that the CGT bill could be completely or virtually eliminated by virtue of some old less known tax law, depending on the facts - but if this is possible MIL's MIL will have to stop paying the nominal rent and this would need to be doone ASAP. It really is a complicated subject and really is very difficult to advise in a general capacity. If the elimination of CGT is not applicable (like I say, it depends on the facts), it may be possible to reduce the CGT substantially anyway with a bit of forward planning. It really would be worth seeking a bit of advice on this - could save a small fortune! IHT is Inheritance Tax. Broadly, if your MIL's MIL has assets (which will include the value of the house - even though she does not own it - see previous post) in excess of the IHT Nil Rate Band (Currently £285k), then there is potential exposure to IHT on 40% of the excess at some point. Again, I would suggest that your MIL's MIL seeks some IHT advice. Like I said, I am happy to look at this for you should you so wish. My email is below. In any event, I hope the above clarifies things somewhat Regards Sherena To clarify - a residential property is not a business asset and hence the 10% tax rule would not apply - I should have put that in the first post Link to comment Share on other sites More sharing options...
PThomas Posted November 28, 2006 Author Report Share Posted November 28, 2006 Hi again You are sort of on the right track, however, the 10% tax everyone talks about is more to do with business assets held for 2 years and sold by a higher rate tax payer. Assuming that CGT is fully payable, then there may be some indexation relief available too (if owned pre 1998), plus it may be possible to uplift the original value if owned pre 82. However, assuming that these are not available and that any income (including state pension) is within the personal allowance, then the tax is more like £18 - £19k. There are ways of reducing this with a little forward planning, however, like I said in my first email, it may be that the CGT bill could be completely or virtually eliminated by virtue of some old less known tax law, depending on the facts - but if this is possible MIL's MIL will have to stop paying the nominal rent and this would need to be doone ASAP. It really is a complicated subject and really is very difficult to advise in a general capacity. If the elimination of CGT is not applicable (like I say, it depends on the facts), it may be possible to reduce the CGT substantially anyway with a bit of forward planning. It really would be worth seeking a bit of advice on this - could save a small fortune! IHT is Inheritance Tax. Broadly, if your MIL's MIL has assets (which will include the value of the house - even though she does not own it - see previous post) in excess of the IHT Nil Rate Band (Currently £285k), then there is potential exposure to IHT on 40% of the excess at some point. Again, I would suggest that your MIL's MIL seeks some IHT advice. Like I said, I am happy to look at this for you should you so wish. My email is below. In any event, I hope the above clarifies things somewhat Regards Sherena To clarify - a residential property is not a business asset and hence the 10% tax rule would not apply - I should have put that in the first post Thanks for the response. I can't understand how the MIL's MIL could be responsible for anything to do with the property as she doesn't own it? I will have to read the contract that was drawn up and see what the wording says as to what her investment in it is called. They have owned the property for some 20 years, I would have to check the details. Surely if it has been purchased to take care of his Mum, this should be taken into account? It wasn't as if it was done as a quick doer-upper with profit in mind. Link to comment Share on other sites More sharing options...
plym77 Posted November 29, 2006 Report Share Posted November 29, 2006 People don't understand IHT very often, so it isn't just you. It is just the way that tax law is. What appears to be happening is a Settlement for IHT purposes - MIL's MIL has an interest in the property for life and as such would be subject to the IHT regime on it's value on death. Unfortunately, it is just the way it works for tax. There is no way to understand it... just have to abide by it unfortunately. I deal with these sorts of cases all the time and it is ilogical to many people... but just the way it is. If the property was owned pre 1988 it may be possible to eliminate a potential CGT gain entirely - but really will need to be looked at specifically and would only be the case if no rent is paid, so if it has been paid for just a couple of years, just stop and get this reviewed immediately - the longer it is the left, the less likely of being able to apply the tax law to your advantage. It is usually more cost effective to be proactive than corrective when it comes to planning. Regards Sherena Link to comment Share on other sites More sharing options...
PThomas Posted November 29, 2006 Author Report Share Posted November 29, 2006 People don't understand IHT very often, so it isn't just you. It is just the way that tax law is. What appears to be happening is a Settlement for IHT purposes - MIL's MIL has an interest in the property for life and as such would be subject to the IHT regime on it's value on death. Unfortunately, it is just the way it works for tax. There is no way to understand it... just have to abide by it unfortunately. I deal with these sorts of cases all the time and it is ilogical to many people... but just the way it is. If the property was owned pre 1988 it may be possible to eliminate a potential CGT gain entirely - but really will need to be looked at specifically and would only be the case if no rent is paid, so if it has been paid for just a couple of years, just stop and get this reviewed immediately - the longer it is the left, the less likely of being able to apply the tax law to your advantage. It is usually more cost effective to be proactive than corrective when it comes to planning. Regards Sherena Hi Sherena I have confirmed a few more details. The property was purchased for £45k, 35k mortgage from MIL's MIL to her son/wife 0% interest. There is a tenancy agreement between the two parties signed the same date as the property was purchased 14/dec/1987. Any further advice? Thanks Paul Link to comment Share on other sites More sharing options...
plym77 Posted November 29, 2006 Report Share Posted November 29, 2006 Difficult without seeing the tenancy agreement and truly sitting down and evaluating all the facts - there is only so much I can help with generally. What I can say is that if the property was subject to CGT (and again, whether this is the case will depend on specific facts) then the CGT, if no planning is done, will be in the region of £24k - £25k. I am sorry I cannot be more specific, but you will appreciate that I cannot advise specifically without going through the proper paperwork first - I am bound by rules and regulations myself! Obviously, whether your MIL want's this reviewed is entirely up to her. I hope the above helps you decide what to do next. Kind regards Sherena Link to comment Share on other sites More sharing options...
PThomas Posted November 29, 2006 Author Report Share Posted November 29, 2006 Hi Sherena I appreciate the position you are in. Can you give us a rough idea on the cost for a proper review of the case? And any indication what sort of saving may be made? Link to comment Share on other sites More sharing options...
plym77 Posted November 29, 2006 Report Share Posted November 29, 2006 hi again Please email me on sherena.glanton@horwath.co.uk with any additional information you think may be relevant (if any), and I would be happy to talk to you further with a view to providing a quote. Kind regards Sherena Link to comment Share on other sites More sharing options...
Recommended Posts
Archived
This topic is now archived and is closed to further replies.