In our weekly series, readers can email any questions about their finances to be answered by our expert, Rosie Hooper. Rosie is a chartered financial planner at Quilter Cheviot and has worked in financial services for 25 years. If you have a question for her, email us at money@inews.co.uk.
Question: Around 15 years ago I helped out my mother by facilitating a mortgage on her home. She had retired and I was working full time, it wasn’t a large amount and my mother repaid my loan. At the same time, we decided to transfer the deeds of the house into my name.
My mother is very much alive and in a healthy state living in her home. Looking forward though, my mother’s will divides her estate into three and I will be honouring her wishes regarding the home. Should I keep the status quo for now or place it in a trust? Will I be subject to capital gains tax?
Answer: You did a generous thing in helping your mother remain in her home and, from what you’ve said, this sounds as though it was driven by practical family circumstances rather than a desire to save inheritance tax.
However, what looked like a straightforward arrangement at the time may have created a few tax tripwires along the way. Before making any further changes, I would strongly suggest getting tailored legal and tax advice so you can fully understand the position and avoid any unwelcome surprises in the future.
The first issue is inheritance tax. Although the property is legally in your name, HMRC may not regard it as having fully left your mother’s estate.
When someone gives away an asset but continues to benefit from it, what are known as the “gift with reservation of benefit” rules can apply. The classic example is a parent transferring their home to a child but continuing to live there rent-free.
If that happens, the property can still be treated as part of the parent’s estate for inheritance tax purposes, regardless of who owns it on paper.
Your question says your mother is still living in the property and makes no mention of her paying a full market rent. If that is the case, there is a strong possibility that the gift with reservation rules could apply.
That is important because many people assume that once seven years have passed, a gift automatically falls outside an estate for inheritance tax purposes. In reality, the seven-year clock generally only works when the person making the gift has genuinely given up the benefit of the asset.
If your mother has continued to enjoy the home much as before, the property could still be brought back into her estate for inheritance tax calculations.
There may also be capital gains tax implications for you. Because the property is in your name but is not your main home, you may have to pay capital gains tax on any increase in its value, since it was transferred to you if you later sell it or give part of it away.
This means that if you transfer a one-third share to each of your two siblings, you could face a tax bill on the increase in value of those shares, even if they do not pay you anything for them.
You ask whether placing the property into a trust would be a sensible next step. Trusts can be useful planning tools in the right circumstances, but they come with their own tax rules and administrative burdens. Moving the property into a trust now could create fresh complications rather than solve existing ones.
There is also another, lesser-known regime called pre-owned assets tax which can sometimes apply where people continue to benefit from assets they have previously given away. Whether it is relevant here will depend on the precise circumstances, but it is another reason why specialist advice would be worthwhile.
The encouraging part is that your mother is, as you put it, “very much alive” and in good health. That means there is time to review the arrangement properly. Depending on the exact legal structure and the family’s objectives, there may still be options to revisit or even unwind some of the decisions made 15 years ago if professional advice suggests that would produce a better outcome.
Family arrangements like this are often entered into with the very best intentions, and helping a parent remain secure in retirement is something many readers will sympathise with. The difficulty is that tax law does not always follow common sense.
A solicitor or tax adviser specialising in private client work can establish exactly how HMRC is likely to view the transfer, assess any inheritance tax or capital gains tax exposure, and help you decide whether maintaining the current arrangement, unwinding it or restructuring it would be the best way to ensure your mother’s wishes are ultimately carried out.