Q I’m in my early to mid-30s and living in a situation like most people of my age, renting shared accommodation in the south. However, unlike a lot of other people, I’m in the lucky position of my parents owning a second home in Florida.
They’ve talked about leaving it to me when they are no longer around but we’ve also talked about selling to me at less than market value and hoping they didn’t pass away in the next seven years to reduce inheritance tax.
If they were to sell it early, what could be the possible pitfalls of purchasing it, and what taxes would be applicable in the US and UK?
PC
A You will need to get specialist advice about the US tax system. What I can say is that were your parents to sell the property in Florida – or dispose of it in another way, say, by giving it to you – they would be liable for capital gains tax (CGT) in the UK. I also know the gain would be calculated by taking the market value – not its sale price – at the date of the sale and deducting what they paid for the property in the first place. So selling it to you for less than it is worth doesn’t bring the CGT bill down.
When it comes to avoiding inheritance tax, the most straightforward move would be for your parents to give you the whole property now and hope to survive for at least seven years after making the gift. Buying it from them for less than it is worth just creates a smaller gift to you, ie the difference between the market value and the sale price, which would be liable for inheritance tax for the first seven years after the gift was made. To sum up: giving you the Florida property now, or selling it to you, may potentially avoid an inheritance tax bill for you but also potentially creates a CGT bill for your parents.
The thing that really puzzles me is why you would want to buy it – and also with what (given that you don’t seem able to afford to buy in the UK). As soon as you own property worth more than £40,000 anywhere in the world, you stop being a potential first-time buyer. Already owning a property means you would no longer be able to take advantage of zero-rated stamp duty land tax (SDLT) on the first £300,000 of first-time purchases of property costing up to £500,000. Instead, it would mean having to pay the higher rate of SDLT if you did eventually buy a home of your own because it would be your second property.
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