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A son intends to buy a 30% share in his mother's house on an outright basis (no gifts involved) and mother and son (single) will continue to live there and share the outgoings in proportion to their respective shares. The mother is a widow aged 75 who owns the whole house, which is currently valued at £250,000.
A son intends to buy a 30% share in his mother's house on an outright basis (no gifts involved) and mother and son (single) will continue to live there and share the outgoings in proportion to their respective shares. The mother is a widow aged 75 who owns the whole house, which is currently valued at £250,000.
If and when the son gets married, he might move out, leaving his mother to occupy the house. The mother's estate is currently below the IHT threshold. The intention is for mother to use the monies to pay off her existing £80,000 interest-only mortgage as she has no means to pay off the capital in five years' time. She receives a small state widow's pension and occupational pensions.
The following questions arise:
(1) Would the sale of share in the house be valued on an open market value basis as if selling to a third party or will the price be reduced by a discount of, say, 20% or 30% on the basis that the son cannot force a sale owing to mother's occupation based on her own equitable interest in the house?
(2) Would this arrangement be caught by the new pre-owned assets legislation (POAT), especially following the Inland Revenue's announcement of 16 March 2005? Would it assist if one were to use market value instead of the discounted value of the house in arriving at the sale price for the son's 30% share?
(3) The son is aware that if he moves out of the house, CGT implications will arise for him on the eventual sale. However, will the POAT provisions apply on the basis of the mother's sole occupation, although she would be sharing the running and capital costs?
(4) To avoid POAT, would it be better for the son to buy the whole house granting his mother a lease for, say, 15 or 20 years or life, with a right for her to live there for life whichever is earlier? Thus the £250,000 open market value will be heavily discounted at, say, 50% as mother will be treated as a sitting tenant and she will be paying a peppercorn ground rent and running costs, whereas son will be responsible for maintenance of the house.
Readers' thoughts on the above points are welcomed.
Query T16,624
