This is a complicated one. Anti-avoidance legislation is now in place to prevent the use of trusts with a view to avoiding inheritance tax.There are also special rules in place to deal with situations where a person gives something away for inheritance tax (IHT) purposes but then, directly or indirectly, continues to receive a benefit from that gift.These are the ‘pre-owned asset’ rules.
If your father sells his home and buys a new house as a joint owner with you and your wife with the proceeds, then that home may be classed as a ‘pre-owned asset’. This means income tax may be due on the appropriate rental value of the property, unless your father pays you rent. Opting for this method of ownership would mean the money would not form part of your father’s estate as long as he lives for a further seven years after the property purchase.
You can get around the pre-owned assets rules if you can prove that both you and your father occupy and share the expenses of the property. For this to be successful, your father would have to prove that he is financially responsible for his share of the property and its maintenance. Extreme care would be needed to adopt this strategy but it can work.
If your father is caught by the pre-owned asset rules, then he can choose to opt out.This means he will not have to pay income tax but instead his share of the property will be treated as part of his estate and liable for IHT upon his death.
So you have three options. You can set up a financial situation that makes it clear that your father is financially responsible for his share of the house and therefore avoid pre-owned asset charges and inheritance tax. Your father can opt to pay income tax on the rental value of the home, or it can remain part of his estate and be liable for inheritance tax.
I would advise you discuss your situation with a specialist tax adviser and also do the sums to work out whether income tax or inheritance tax will be more tax efficient.
David Wesley-Yates is a chartered tax adviser at Red & Black Accountancy.