Ask Sindie: A family under one roof, but is there a tax shelter?

A reader asks about the implications of a complicated property purchase
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The Independent Online

Q: My wife and I live in the same Gloucestershire village as our daughter, her husband and their two sons. We've decided that, as we're getting on a bit, perhaps we could buy a property large enough to house all of us.

On the market nearby is a large farmhouse that would easily convert into two suitable dwellings.

At first this seemed an attractive proposition, but we're now having second thoughts. An estate agent suggested that since the house is registered as one dwelling, it would be difficult to treat it as two - and quoted problems with council tax as just one obstacle.

Second, our current house is worth a lot more than that of our daughter, and so we would pay most of the purchase price of the new property and also the stamp duty. Legally, where would we stand on this point of ownership? We would like the house to be owned 50:50.

Third, our wills stipulate that on the death of the surviving spouse, all assets, including the house, should be split three ways between our daughter, the two grandsons and our son. By moving to the new property, these assets are going to be considerably reduced.

In this case, my daughter would, I hope, make up the difference in our son's share by, for example, raising a second mortgage to hand over a cash sum. Would this lead to a tax bill for her or us?

Could you give me an idea of the real problems of moving to the new property - and any way in which we might mitigate them?

KJ, Glos

A: This situation is very complicated and you must take specialist legal advice before proceeding.

However, I can understand your wish to get a better perspective before committing yourself to legal fees that may run into hundreds of pounds.

First, you need to get the correct information from the appropriate bodies - for instance, on whether it is advisable or even possible to split the house into two dwellings. Here you must speak to the local authority planning department directly, rather than relying on information from the agents.

It could be you decide to move to the house and keep it officially as one dwelling.

As for ownership, to end up with both parties having equal shares - whether it's as one dwelling or two - it may be necessary that part of the deposit you put down is treated as a financial "gift" to your daughter and her family. To escape the possibility of being liable for inheritance tax (IHT) on this, you would have to survive seven years from the date of the gift.

Here's an example. Say you contribute £500,000 towards the purchase (made with your daughter) of a property worth £600,000.

Given that you want only to be a half-owner - with an interest of £300,000 for IHT purposes - you would, in the event of death soon after, be treated as having made a gift of £200,000 (£500,000 minus £300,000) to your daughter. But if you lived for seven years after making this purchase, there would be no IHT to pay.

Richard Grosberg, a partner at solicitors Nelsons, warns that problems could emerge if your daughter and family decided to move out: "The [£200,000] gift would become, retrospectively, a 'gift with reservation'." In other words, it would not matter how long you lived: the house would be included in your assets for IHT purposes.

Now, as for the issue of your assets being split three ways upon death, your daughter could raise a mortgage on the property in order to hand a cash sum to your son. However, it would of course be a matter for her and depend on factors such as her income and other commitments.

So, with the help of a lawyer, you need to work out a way to ensure that your son will be able to come by his full share if some of his inherited wealth is tied up in the property.

This could be achieved by methods such as a secured loan or equity release, though these are high-risk strategies that need long and careful consideration.

IHT is levied according to the value of the estate of the person who has died, so any mortgage your daughter takes out would be irrelevant to this bill.

To reiterate, you need specialist advice on a number of aspects of this plan.

If you need help from our consumer champion, write to Annie Shaw at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS or email We cannot return documents, give personal replies or guarantee to answer letters. We accept no legal responsibility for advice given

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