Transferred residential to our sons?

by Readers Question

9:41 AM, 20th November 2020
About 4 days ago

Transferred residential to our sons?

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Transferred residential to our sons?

I and my brother have in Aug 2020 transferred our residential house we live in to our sons who all live with us in the same house. (Essentially we have gifted it to them to plan for inheritance)

After reading the gov.uk site, I was advised that as Myself and my brother still live in the house after transferring this we need to pay rent to the new owners (our sons) to avoid any capital gain impacts to our sons in the future

Can someone help and point me to how I can:
1) determine how much rent I would need to pay for the room we occupy in the property
2) confirm if we need to pay this rent as I keep reading and hearing mix messages some of which advise that this is not required

I would appreciate some clarification.

Many Thanks

Pratev


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Comments

Neil Patterson

9:50 AM, 20th November 2020
About 4 days ago

Dear Pratev,

There would be no SDLT to pay if there was no mortgage transferred as there was no consideration for the gift. That is assuming the property was unencumbered.

Likewise, it would also have needed to have always been the Principal Private Residence of the persons making the gift without there having been any CGT incurred.

On the CGT subject -this is a good article >>
https://www.taxinsider.co.uk/transferring-the-family-home-to-family-members-tax-issues#:~:text=3.-,Capital%20gains%20tax,private%20residence%20is%20being%20gifted.

Mark Smith commented: "I would say the 'will trust' is the best option. The sons will then take at the base cost of the property at that time, and would save CGT on a later sale if they decided to move out, but keep the property for rental etc."

Chris Bradley

11:20 AM, 20th November 2020
About 4 days ago

I am confused by neil's response as the person is asking if they need to pay rent, not about capital gains on the transfer which has already taken place.

What I understand is the son the new owner has received (as a gift) the property in aug2020 and the parents are still living there.

For inheritance tax, the question is --was the gift made with a condition? if there was a condition that the parents still live there for free--then the gift is not a true gift and would still count for inheritance tax. if the parents paid rent then it would be a true gift. but the rent would need to be at the market rent and the son would need to declare the rent as income on yearly self assessment and pay any tax due. the property must also be up to renting standards as the son would be a landord--a resident landlord.
The son should have the parents sign a lodger agreement and agree a rent,and he would pay the bills etc and charge them for bills if not included in the rent.
to establish a market rent, you could speak to a local estate agent for an estimate, check the local council sites to see what housing benefit they pay out for a room basis or check "google" for any rooms to rent. Keep copies of what research you did to establish the market rent.

LordOf TheManor

11:40 AM, 20th November 2020
About 4 days ago

I agree with Chris Bradley's comment about the question and that a room rent at market rate should cover it. I would suggest setting up a standing order so that this arrangement can be evidenced if required in the future.
I would also comment on the property's maintenance arrangements. Any bills for repairs from now on must be paid for by the sons and receipts kept to support the change of ownership.
Make sure all records are kept well filed and don't dispose of them after 6 six years.

moneymanager

12:15 PM, 20th November 2020
About 4 days ago

With regard to inheritance tax the utility of a pre death transfer to direct descendants will depend on the value of the property, the whole estate and of course the ages of the transferors. The main reason for this is that each of the original owners had, and have now lost, the benefit of the additional £175,000 principal residence nil rate band unless their residual estates exceed the main NRB https://www.gov.uk/government/publications/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band

What the transfer has created is a liability to Gordon Brown's spite, his "revenge" for HMRC losing the estate planning case known as the "Lady Eversden" strategy which he subsequently attacked with his Previously Owned Asset Tax https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm44000

Jo Westlake

19:14 PM, 20th November 2020
About 3 days ago

If the rent is below £7500 a year as a lodger presumably it should be covered by the Rent a Room tax exemption.
To determine market rent a good starting point would be the LHA rate for a room in a shared house and then tweak it up or down accordingly after checking websites such as SpareRoom for similar local rooms with live-in landlords. Keep good records of how you arrive at the rental figure.

Simon Lever

13:39 PM, 22nd November 2020
About 2 days ago

The reason why a rental needs to be paid is for inheritance tax (IHT) purposes.
If you give away an asset but continue to enjoy use of the asset, then there is a reservation of benefit and for IHT purposes the asset still forms part of your estate.
For IHT if you gift an asset then it becomes a Potentially Exempt Transfer (PET) which falls outside of your estate for IHT after 7 years from the date of the gift. If a reservation of benefit exists then the 7 year period does not start and even if you died, say, 25 years after the gift if you had not done anything to remove the reservation of benefit then the asset would still form part of your estate.
One way to remove the benefit is to pay market rent for the use of the asset. If you only occupy one room then you need to determine what the market rent for the room is. However, I presume, you will also still have use of the other facilities such as kitchen, bathroom, garden, living space and the use of these will also need to be factored into the rent figure.
The rent has to be full market rent – any under charge still leave a benefit and therefore does not work. You may need to check if 2 such rooms are rented if the property then becomes an HMO!
Also consider that eh recipient of the rent will have to pay tax on it.
This article sums up the situation nicely: https://www.taxadvisermagazine.com/article/gifting-family-home


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