My 70-year-old mother has bought a holiday home in Florida for $200,000 (£130,000) that she wishes to use for winters abroad, but also to gift to me. By doing this soon she hopes to protect me from paying inheritance tax (IHT).
My husband and I are US residents and taxpayers. What restrictions or capital gains might we face, and should the legal paperwork be dealt with in the UK or America?
TM, by email
Tax is inescapable on your mother’s holiday home: the question is whether she pays income tax on it year by year or you pay IHT on her death. You imply that your mother is a UK resident and I assume she is also domiciled here. If so, her worldwide estate will be liable to IHT in Britain when she dies.
She will also be in the capital gains tax (CGT) net, which will apply on transferring the holiday home, even as a gift — but that may not be a problem if she has not owned it long. The gain may be nil or small enough to fall within the individual annual £10,600 exemption limit, assuming she has no other gains in the same tax year.
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Her estate could avoid IHT if she lives for seven years after making the gift — but not under her current plan. If she keeps the right to use the property, it will count as what HM Revenue & Customs (HMRC) calls a gift with reservation of benefit, because you will not have the entire benefit of the gift as she will be using it too.
For IHT purposes, it will be treated as if she has not given it to you and it will still count as part of her estate, even though she may have paid CGT on the transfer to you. That will not matter if she has no more than another £195,000 of assets, keeping her estate below the £325,000 IHT-free limit.
If her assets amount to more, one way round the IHT problem would be for her to pay you a market rent. You would have to pay US federal income tax on the rent, after deductions for costs such as maintenance.
Your mother would need to watch out for the UK’s pre-owned assets tax (Poat). It charges income tax on the market rent — paid or not — for a property that has been given away but is still enjoyed by the giver.
Poat will not apply if the holiday home is still in your mother’s estate or if she pays the full market rent to use it. So, to avoid IHT, she has to pay Poat or pay you rent that is taxable in America. Whether that amounts to more than the eventual IHT depends partly on how long she lives.
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Speak to Florida lawyers about the best way to buy the property, and accountants in the UK about Poat and IHT.
I want to buy the house of a 91-year-old neighbour who divorced two years ago. His wife is claiming half the house’s value, which would force him to move out. How can I pay off his ex-wife and let him live in the house?
MS, by email
Much depends on your neighbour’s ability to pay rent. If he can, the solution is straightforward. You could buy a half (or greater) share in the house. He could pay you rent, on which you would pay income tax, and he would have the lump sum to pay his ex-wife.
You could buy the whole property, which might have the advantage of giving him enough cash to pay rent to you. He could deposit the proceeds with a solicitor, who could administer the fund with an instruction to keep enough money in hand to pay the rent.
You could buy only half the house and, if he is unable to pay rent, roll up the rent until his death. You would still pay income tax on the rent, irrespective of when you actually receive it.
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Alternatively, you could lend him the money to pay his ex-wife, and he could pay you interest. You would pay income tax on that interest. You should set up a formal loan agreement with a charge over the property to give you security, anticipating that the house would be sold on his death and you would be paid out of his estate.
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