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How to Structure Part-Ownership for Parent - tax avoidance question. Please help

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  • How to Structure Part-Ownership for Parent - tax avoidance question. Please help

    Hi there, thank you for checking in on my query. It’s not a simple one and requires a good tax specialist. I’ll be very grateful for any thoughts, especially if there’s a definitive answer!

    My mother is currently upsizing, and I'm paying for the difference. The additional cost of the new property above the sale price of the old property is £17k. And it will need £25k spending on it within a year or two of moving in. I will pay various fees also. Thus a total provision from me of circa £40k. The purchase price is £185k.

    I want to know how to structure the equity position, to minimise tax implications. Taxes I need to consider are:

    Capital Gains Tax.
    Inheritance Tax.
    Council Tax.
    Income Tax.
    Appropriation of funds by the Government should my mother need to go into care at any point (nursing home fees).


    APPROPRIATION FOR CARE HOME FEES
    The law currently allows the government to appropriate property equity to pay for care fees. As such, I need to ring fence my financial interest in the property to at least my investment. Ring fencing prevents appropriation, but means I must register ownership, which then renders me liable for any income tax or CGT.
    Generally, I would like very much to minimise the appropriation potential. In other words, I’d like to maximize my ownership. However, this will have income and CG tax implications so may not be the best approach.

    CAPITAL GAINS TAX (/INHERITANCE TAX)
    On a part-ownership basis, clearly I will be liable for CGT in event of price rise until subsequent sale of the property. If my mother outright owned, there would be no CGT (and INHERITANCE TAX is not a concern as the total value of the estate is below the threshold).
    So is it better to provide my mother with a ‘loan’ or a ‘mortgage’ (I understand ‘statutory minimum‘ loan charge to be 3% p.a. – I don’t know if there is a minimum for a ‘mortgage’) which would be taxable? Taxable income would be £1,200 at 3%; tax liability at 40% = £480p.a.
    I suppose that the answer to this question is also determined by expectations of property price movements, and the holding time period. The holding period is likely to be 10-15 years, 20 at a push. I expect prices to fall in the short term but in 10 years, I have no idea, probably a rise. Clearly the situation is ambiguous and there are no crystal balls so I would broadly, like to minimise CGT implications.

    INCOME TAX
    I own my own property so my ownership in this would be classified as investment property for tax purposes. Would part ownership (I believe referred to as 'tenants in common') therefore require my mother to pay me rent? ...which would be liable for income tax which clearly we would want to avoid. I guess rent would need to be levied at a market rate that appears to be around 4% in her area (£1,600 p.a. based on £40k). I could offset income against home improvement costs and furnishing to avoid tax liability. But I assume I could only offset home improvement costs in proportion to the ownership (I could account for costs at 40/(185+25) = 19% so on an annual cost basis of £5k I could offset costs of 19% * 5k = c. £1k. However, it’s unlikely that we will be able to keep such a run rate of costs up, so there would definitely be an income tax implication within several years and thereinafter.

    COUNCIL TAX
    I am pretty sure part ownership would not render me liable for council tax.

    So, I see this as all boiling down to these options:

    1.
    Loan to my mother. Income is taxable, and CGT implications on my portion of the property. Can offset costs against income (the costs would be sunk however, and exposed to appropriation potential). Part ownership portion protected from appropriation.
    2. Mortgage to my mother. Same income and CG tax implications as loan. But can a mortgage be charged at a lower rate than the statutory minimum loan charge rate? Costs can be offset. Part ownership portion protected from appropriation.
    3. Straightforward gift of £40k to my mother. This would be liable to appropriation by the government, but not subject to CGT or income tax.
    4. Some other options I’m unaware of! Second home, tenancy options, my use of the property, etc.

    Have I summarised this ok? Be great if you can offer some ideas, tell me if I’ve got this right, and if you feel there’d be a most sensible route?

    Thank you,
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