Writing for Taxation magazine, BKL tax adviser Terry Jordan answers a reader’s query on home conversion costs on inheritance tax assessment. Terry highlights several planning opportunities.
‘My client’s mother is 80 and living on her own in the family home worth £1.5m. The house is large and could be converted into three flats. The plan is to rent out the top and middle floors and the mother could live on the ground floor with access to the garden. It is estimated that the conversion might cost about £200,000.
We believe that the revenue from renting the top two floors would provide her with a reasonable income, which would allow her to obtain home help and thereby permit her to stay in the house for a little longer.
If my client were to lend his mother the money to pay for the conversion, could the £200,000 come off the value of the house before inheritance tax is assessed on her death?
I look forward to hearing from Taxation readers.
Query 19,266– Planner.’
Reply by Terry Jordan
There are several planning opportunities here
We are not told whether the client’s mother is divorced or widowed. If the latter she may well potentially benefit from transferred ordinary and residence nil rate bands. On that basis, she could have £1m free of inheritance tax by 6 April 2020. That is when the residence band will increase to £175,000 a person as long as property that has been her home passes to one or more direct descendants.
The answer to Planner’s question appears straightforward. If the mother owes her son £200,000, as a matter of law when she dies that sum will be deductible when calculating the inheritance tax due on her estate. This applies as long as she has not previously made gifts to that son (in view of FA 1986, s 103) and provided the sum is repaid after death (in view of IHTA 1984, s 175 A).
There would still be a liability to inheritance tax on the mother’s death and other planning might be considered. If the son or another relative might occupy part of the property, advantage could be taken of the ‘sharing’ provisions in FA 1986, s 102B (4).
Another possibility would be for the mother to gift one of the new flats as long as care was taken to avoid the reservation of benefit rules such that the value fell outside her taxable estate after seven years.
Alternatively, she might take out a lifetime mortgage with the capital and accrued interest being deductible on death and give away the sum borrowed in expectation of living seven years or use it to invest in a discounted gift trust that would afford an immediate inheritance tax saving.
For more information, please get in touch with your usual BKL contact or use our enquiry form.