Hello, my name is Matthew Taylor and I am the Business Development Director here at Equilaw. Today, I am joined by Malcolm Emery of Legal Studio Solicitors. Malcolm is a solicitor and chartered tax advisor who specialises in tax, trust, and probate matters.

In today’s podcast Malcolm is going to provide some practical guidance on issues where a child has inherited an interest in the property, but the surviving spouse is also looking to take equity release.

First question for you Malcolm, a married couple may have owned the property as tenants in common and on the death of the first spouse they leave their interest in the property to their child or children.  The surviving spouse who owns a 50% interest in the property decides to release equity from the property but is unable to do so.  Could you please explain what prevents the equity release from proceeding?

The surviving spouse must be the sole owner of the property for their equity release to proceed. This means that the child or children would need to assign their interest in the property to their parent.

Thank you, so what will usually happen next?

A – The child or children will need to obtain independent legal advice on the options available to them which are:

1. Do nothing and retain their interest in the property although this does mean that the parent’s equity release cannot proceed
2. Sell their interest in the property to their parent; or
3. Gift their interest in the property to their parent.

If the child or children agree to assign their interest in the property to the parent how is this actually dealt with?

The child or children would need to sign a document called a deed of assignment. This document will evidence that the child or children are assigning their beneficial interest in the property to their parent.

Does the parent need to sign the deed of assignment?

Yes, the parent will need to sign the deed of assignment. They are signing the document to confirm that they accept the terms on which the assignment is being made. This is particularly important if we are dealing with a sale of the child’s interest.

So, apart from signing the deed of assignment is there anything else that the child or children need to consider?

Yes, the tax implications relating to the assignment will need to be considered.  There are two taxes to be considered namely inheritance tax and capital gains tax. If the child or children are gifting their interest in the property to their parent this is treated as a potentially exempt transfer for IHT purposes. Which means they must survive for a further seven years to avoid a tax charge arising. For CGT purposes most family members are treated as connected persons which means that any transactions undertaken between them are treated as taking place at market value. Therefore, a child may be prepared to gift their interest in the property to their parent. Although they are not receiving any consideration for their interest in the property HM Revenue & Customs will deem them to receive full market value.

So does this means then that the child who is gifting their interest in the property could end up with a CGT liability?

Yes, that is correct. Tax changes introduced in 2020 now mean that any CGT liability must be paid within 30 days of the assignment of the property being completed.

Thank you Malcolm that’s really interesting. You mentioned that the CGT is payable 30 days of the assignment being completed.

Yes that is correct, for CGT purposes the beneficial interest in the property is deemed to be disposed of on the date that the deed of assignment is completed. This is the date that the document is dated.

What about a situation where the child is prepared to gift their interest in the property to their parent, but they do not have the funds to pay the tax? What happens if the parent agrees to pay the CGT liability for them? Does this change the position?

Yes it does. In this type of situation the child is no longer gifting their interest in the property to their parent. Instead, they are selling it for consideration equal to the tax liability. When Equilaw complete the parent’s equity release they are required by the lender to transfer the sale proceeds to the solicitor representing the child or children. The solicitor will then account for those funds to their client in accordance with their instructions. 

So, due to the immediate payment of any CGT liability I suppose it is important that the assignment of the child’s interest to their parent is not completed too early?

Yes, that is a very good point, Matthew.  Most lenders require the property to be in the applicant’s name before their equity release can proceed. This can sometimes cause problems where the applicant has inherited their interest in the property and the property is still in the deceased’s name. However, this should not present a problem in the current situation as the surviving spouse is already named as one of the legal owners of the property and can apply to have their deceased spouse’s name removed from the title, by submitting form DJP to the Land Registry. Together with the death certificate. This means that the deed of assignment can be completed at the same time as the equity release is completed, resulting in the funds being available in good time to pay the tax due.

So, I think what you are saying here Malcolm is that the CGT position can really cause problems if they are not considered in advance?

Yes that is correct, although it may be possible to avoid a CGT problem if the property was inherited under a will or the rules of intestacy within the previous two years, and the child is willing to gift their interest in the property to their parent rather than selling it to them. The gift by the child could be made through a deed of variation, which has a different tax treatment than if the gift is made via a deed of assignment.  Providing the child is not receiving any consideration from their parent for their interest in the property the gift of the interest in the property made by the child is deemed to be made by the deceased parent for both CGT and IHT purposes. Whilst a deed of variation is a useful way to avoid IHT and CGT liabilities from arising, certain provisions must be included in the document for it to be valid and therefore professional advice should always be obtained.

Thank you Malcolm that’s really useful. What would happen if one or more of the children are under the age of 18.  Does that change the position?

Yes it does, in this situation the child’s interest will be held on trust for them until they reach the age of 18, unless the deceased parent’s Will specifies a later age when the trust should end. Even though the child is under the age of 18 this does not necessarily mean that the surviving parent’s equity release cannot proceed. Whilst the trustees who own the child’s interest for them under the terms of the trust cannot agree to gift the interest away, to the surviving parent, there is nothing to prevent them from selling the child’s interest to the surviving parent for full market value. If the surviving parent is also one of the trustees it is very important that an independent valuation of the property is obtained to ensure that full market value is being paid.

Thank you so much Malcolm, I think we have covered some really good ground today and our listeners today will certainly find this podcast helpful. One last question, is there anything else that the parent needs to consider?

Yes, they should ensure that their Will is up to date and consider putting a property & affairs lasting power of attorney in place. This will enable decisions to be made about their financial affairs if they lose capacity and are unable to do this for themselves.  This is very important if the equity release has a drawdown facility attached to it. As the application process for the registration of the lasting power of attorney can take over 3 months to complete this matter should be given immediate attention.