Aug 2023
Q: My son and I both live in the house that I purchased many years ago when I had a young family.
At the time I was married to my husband who has since passed away and my son grew up here. When my son’s marriage broke down a few years ago, he came back to live with me. I’m not getting any younger, so we recently agreed that he would take over 50% of the property.
The 50/50 share was for many reasons - but the main one was to avoid overpaying Inheritance Tax (IHT).
We don’t pay each other rent as that seems daft - we’d only be giving rent to one before taking it back from the other for the 50% share we own each.
However I’m now slightly worried that if I die, he will be liable for a tax double whammy as he may need to pay IHT and Capital Gains Tax.
Where do we currently stand? Have I made a terrible mistake?
A: As you’re both living there, the answer would be no - but I hope you received financial and legal advice before doing so.
You may have read our previous blog about setting up your children for a “double tax whammy” and how you can avoid it.
Someone had written in to us to say that they’d signed their house over to their children as a way of avoiding IHT. However, because they continued to live there, without their children, and without paying any form of market rent, the government would view that as a “gift with reservation”.
The rules state that you must give away all benefits of the asset in order for it to be excluded from IHT when you die.
In the case mentioned above, the person did not give away all the benefits of the asset, because they continued to live there and didn’t pay any market rent - hence why it was viewed as a gift with reservation. This meant, not only would the children still be liable to pay IHT, they would also need to pay Capital Gains Tax when the property was sold.
In your case, however, you and your son are in joint occupation. As long as it is 50/50, and your son contributes to his share - including running expenses - then the gift with reservation rules do not apply to you.
If he does not make any contribution, then that would be classed as a benefit. Also, these rules would only apply while your son was living there - so if he meets a new partner and decides to move out, then you would need to pay full market rent for your occupation of his half of the property.
This is a very complicated area of law and it’s highly recommended you seek legal advice.
Contact Downs Solicitors Private Client for more information.
