Tax implications of buying a home for an elderly friend or relative - tax and financial advice from independent financial adviser (IFA) Isis Financial Planners
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 August 2010. To browse the articles from a previous year, please visit the main Property and Tax page of this website.
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- Tax implications of buying a home for an elderly friend or relative - 11 August 2010
Can I still make a lifetime gift of a property?
There used to be a simple way of providing a home for Aunt Mildred without unpleasant tax consequences. "Dependent relative relief" meant that if you bought a property for an elderly (generally taken as 65 and over) or infirm relative, yours or your spouse's, and they lived rent-free, you did not have to pay CGT when it was sold.
This worked in the same way as principal private residence relief on your own home.
But the relief was withdrawn from April 6 1988. Now it can only be claimed if you sell a property that was occupied by a qualifying relative before that date. Relief will be due for the period of occupation plus the final 36 months of your ownership - even if the relative moved out years ago and the property has been let commercially ever since.
Except when dependent relative relief does still apply (as explained above), the many children who have helped their parents buy their council properties at a discount under the right-to-buy scheme over the past 25 years will have to pay CGT on sale.
The rules of the scheme state that the legal title must be held by the parents but the "beneficial interest", which is what decides liability, often belongs to their offspring.
To add insult to injury, the official HMRC view is that the base cost for tax is the discounted cost, thus increasing the gain.
So how can we house the aunt tax-efficiently now?
There is no similar relief but building a granny flat, or annex on to your home, for a relative, should not prejudice your entitlement to full CGT relief when you sell. It would be regarded as part of the whole, rather than a separate residence.
Can my parents give me their house and still live there for free?
No. I cannot emphasise enough that this results in the worst of all possible tax worlds. It is ineffective for IHT because of the reservation of benefit (living for free) and forms part of the parents' estates after all; but it is effective for CGT so the gain on sale is assessed on the children. Don't do it.
However, parents can gift a share of the property to their children, provided they are living in it too, without being caught by either the reservation of benefit rules or Pre-Owned Assets Tax.
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