Loan From Parents To Pay Off Mortgage February 2009
Isis Financial Planners' Maggie Fleming answers reader's questions in Saturday's Daily Telegraph newspaper for the Property Clinic section.
There is a wealth of information on all aspects of property and tax from Capital Gains Tax and Inheritance Tax to other technical and challenging issues of this complex subject. This page shows the articles for February 2009. To browse the articles from a previous year, please visit the main Property and Tax page of this website.
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Inheritance Tax On Life Interest In A House - 26 February 2009
Loan From Parents To Pay Off Mortgage - 23 February 2009
Loan From Parents To Pay Off Mortgage - 23 February 2009
I have the opportunity to pay off my mortgage with an interest-free loan from my parents. Are there any taxation issues for either of us this way?
Maggie Fleming writes:
From a tax point of view, this is one of the best ways for parents to help children, although fewer are likely to be able to afford it in future with pension and interest income suffering as a result of the financial crisis.
As it is a straightforward loan, your parents will not acquire an interest in the property and therefore will not have to pay any capital gains tax when it is sold. You are the sole owner and any gain on sale will be fully exempt, provided the property remains your only or main residence. It will be just like having a mortgage, except that it will be from the "Bank of Mum and Dad" rather than a commercial lender. The repayments you make to them will be of capital, not interest, and therefore they will not have to pay income tax on these. From an inheritance tax perspective, you should draw up a formal agreement stating that the loan is repayable on demand and that the property is security for the loan. If any of the loan is outstanding at their deaths, this would form part of their estate.
Depending on your parents' age, health and financial circumstances, they may wish to consider making a gift, rather than a loan. This would have no implications for CGT or income tax but, provided they survived for seven years, the sum would fall out of their estates for IHT purposes, which means it would be tax-free.
Inheritance Tax On Life Interest In A House - 26 February 2009
My father's will gave his long-term companion a life interest in his house, where she has lived alone for the past 20 years. When she dies, it will revert to me. She has heard that her estate might be liable to inheritance tax, based on this interest. Can you explain, please?
Maggie Fleming writes:
I shall outline the position for life interest trusts set up before March 22, 2006, which is clearly the case here. For inheritance tax (IHT) purposes, a person who has a life interest in a property (the "life tenant") is treated on death as if he or she had actually owned it. This may sound strange, as she has no right to the capital, but only to live in the property, but that was the legal position from the introduction of estate duty in 1894 right up to March 2006.
Therefore, when this lady dies, the market value of the house at the date of her death will be aggregated with her other assets and IHT levied at 40 per cent on anything above the nil rate band. This is currently £312,000, but it increases each year. The proportion of the tax attributable to the house will be payable by the trustees of the life-interest trust while the part of the tax attributable to her other assets (known as the "free estate") will be payable by her executors. It is worth noting that, as a result of recent legislation, a larger nil rate band may be available if she is a widow.
The IHT rules were revamped completely in the 2006 Budget. From March 22, 2006, new trusts of this kind have been subject to the same IHT regime as discretionary trusts; so the property will no longer be liable to IHT on the beneficiary's death, but will instead be subject to an IHT charge every 10 years and to an exit charge when property leaves the trust (at a maximum rate of 6 per cent).
Paul & Ian
"Thank you so much for your kind help, patience and understanding of our situation"
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Andy, Norfolk
"I had been looking for some time for someone with the broad skills and knowledge to help with the commercial, tax and financial aspects of my retirement and Isis were the only company I could find that met my requirements."
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