Sibling wants 'House Swap' - Pitfalls?

nobbin

OK so here's the facts:

Widow mother to 4 adult kids living on own in large 5 bed house in desirable area.

On relatively low income, means tested pension. Struggling with costs to maintain property & heat during winter etc. Is adamant won't sell property.

Youngest Kid (Married with a few of their own kids) currently renting, has the cost of a 2/3 bed in same area in the bank in cash (sale of previous property), with a bit left over. Not in a position to get a mortgage due to 1 spouse self-employed starting own business. Need a bigger house due to kids etc.


They are proposing to buy a smaller property outright and 'swap' with the mother. She is open to the idea. Makes it more affordable to maintain/heat etc. In time House will be left to 4 kids to split.

Is this a crazy idea? What should other siblings do to protect their interests? Any other implications? House would still legally belong to mother. Could they claim the cost of any house improvements made to larger house against the estate when the time comes.

Thoughts, opinions etc. Thanks.

Toots

You'd need to speak to a solicitor about it TBH. I wouldn't be at all surprised if there was a tax implication there if there was a difference in value between the houses.

nobbin

Toots wrote:

You'd need to speak to a solicitor about it TBH. I wouldn't be at all surprised if there was a tax implication there if there was a difference in value between the houses.

Thanks but the bigger house will still legally belong to the mother....& they don't intend paying her rent. They see covering the costs of maintenance & upkeep on the houses as the offset for the benefit of the swap, so don't see where a tax implication would occur.

Eric Cartman

nobbin wrote: »

Thanks but the bigger house will still legally belong to the mother....& they don't intend paying her rent. They see covering the costs of maintenance & upkeep on the houses as the offset for the benefit of the swap, so don't see where a tax implication would occur.

they'll occur when the mother dies and one sibling tries to inherit the lot.
Also OP , there would be little to stop your other siblings laying claim to the bigger house.

4ensic15

When the mother dies the occupying sibling would be entitled to a quarter share of the big house (if the mother goes for an even split) and will also have the possibility of selling the small house. The occupying should be able to get a mortgage to pay off the other siblings if he still wants the bigger house. Alternatively he can take his quarter share plus the existing house and buy a replacement house. If all parties are sensible there shouldn't be a problem but if greed enters the picture there will be serious trouble.

Water John

After the swap, the mother owns the new house and the youngest kid owns the large house, is my understanding.

What the mother does with this in her will, is a separate matter.

The swap needs a good Accountant as much as a Solr.

Possibly fairer if the mother divides the new property in her will between the other three siblings. Looks like the youngest kid will already have gained a significant benefit. A larger house for the price of a smaller one.
The cost of running and mantaining the large house is not relevant as they require this house for their size of family.
Seems they are looking for two bites of the cherry. Benefit now and benefit later.

Since the transfers proposed in the swap are vertical, mother to child, child to mother, I doubt if there is a significant tax implication.

December2012

nobbin wrote: »

Toots wrote:

You'd need to speak to a solicitor about it TBH. I wouldn't be at all surprised if there was a tax implication there if there was a difference in value between the houses.

Thanks but the bigger house will still legally belong to the mother....& they don't intend paying her rent. They see covering the costs of maintenance & upkeep on the houses as the offset for the benefit of the swap, so don't see where a tax implication would occur.

Just because they don't see the tax implications doesn't mean there aren't any.

They each need their own solicitor and accountant

Mrs OBumble

Hang on - what do you mean by swap?

A legal transfer of ownership?

Or just that mammy lives in the smaller house, which occupying sibling (let's call them OS) owns. And OS lives in the big house which mammy still owns?

If the latter, then there may be a tax implication if the market rental of the two properties is vastly different. Or even if they're they same - I'm not sure. Speak to a tax adviser, for sure.

Also there may be some interesting issues re insuring the houses - only the owner can insure them, but they're not exactly tenanted in the regular sense. I'd suggest talking to a broker about how this can be done. I'm sure it must be something that rural families sometimes do.

And there may be some family relationship challenges if mammy should happen to die before OS can afford to get a mortgage - Mammy's will should be updated to cover this possibility, eg she might think that it's fair to give OS a N-year window before the house is sold.


Whether this can work will partly come down to your family expectations around inheritance rights. These can vary widely between families, so you need to think carefully about your own ones. (eg I grew up expecting to inherit nothing - this value was instilled from a very young age, and informs how I think about property. But I know that others have very different views.)

murphaph

It's not super complicated really. I don't see any tax issues as neither house is to be rented. It's my business whom I let live in my house for free!

The insurance issue would need clarification for sure, but I highly doubt any problems there as long as the properties are occupied, it generally doesn't matter by whom as far as the insurance company is concerned. Just inform them in writing.

There is a clear upside in this arrangement for the other siblings: the big old house doesn't fall apart while they are waiting to inherit it. It should be made clear to the big family though, that the benefit of temporarily living in the bigger house is to compensate the maintenance and that when the mother passes away, that there is no "debt". This would need to be nailed down before anyone moves anywhere, so proper legal advice should be sought.

uberwolf

murphaph wrote: »

It's not super complicated really. I don't see any tax issues as neither house is to be rented. It's my business whom I let live in my house for free!

.

Not true according to revenue who would consider this a gift. Whether it could be offset by a gift going in the opposite direction is the question. I would take advice from a legal and tax perspective to protect everyone.

Magic A

uberwolf wrote: »

Not true according to revenue who would consider this a gift. Whether it could be offset by a gift going in the opposite direction is the question. I would take advice from a legal and tax perspective to protect everyone.

Agree with uberwolf, for example the sibling is only entitled to receive a specific amount as a gift from a parent over a lifetime, the rental differential on swap would be treated as a gift and would reduce this allowance. The remaining allowance may not cover the value of the 1/4 of the estate inheritance triggering a tax liability. This one example there may be others,

Both should seek advice from an accountant as they can advise on a structure that would be tax efficient.

evolving_doors

This wouldn't be that unusual for farms I'd imagine . A son takes over the farm (and adjoining family house) while the parents move out to a smaller house, although typically still on the same land (a relative did this swop) . It might be worth looking for a solicitor/accountant in the ag. sector who's dealt with this (maybe ask in the Farming and Forestry forum!).

Magic A

Magic A wrote: »

Agree with uberwolf, for example the sibling is only entitled to receive a specific amount as a gift from a parent over a lifetime, the rental differential on swap would be treated as a gift and would reduce this allowance. The remaining allowance may not cover the value of the 1/4 of the estate inheritance triggering a tax liability. This one example there may be others,

Both should seek advice from an accountant as they can advise on a structure that would be tax efficient.

The couple are also entitled to 6k per year (3k each) tax free under the small gift exemption before the lifetime exemption comes into it.

I would be very surprised if this cannot be done in a way that no tax will be due. Talk to an account who specialises in tax rather than a normal accountant they will know how to approach this with paying little or no tax in mind.

TG860

Absolutely speak to both a solicitor and an accountant.
If they don't plan on paying rent to the mother, then the free use of the property is considered an annual gift equal to the market value rent of the property by Revenue. http://www.revenue.ie/en/tax/cat/guide/free-property-loans.html

Given its a 5 bedroom house in a desirable area, this would likely exceeded the annual 3k per person CAT exemption mentioned above.

Bigus

Agree with getting a solicitor and accountant and. I'm sure they would suggest 3 independent valuations should be gotten for the 5 bed and do some calculations by dividing this value in 4 versus the smaller house in 3 divisions at today's value, to ensure equitable inheritance.

Another solution might be a small bit of Airbnb or student let to solve widows short term cash flow.

murphaph

TG860 wrote: »

Absolutely speak to both a solicitor and an accountant.
If they don't plan on paying rent to the mother, then the free use of the property is considered an annual gift equal to the market value rent of the property by Revenue. http://www.revenue.ie/en/tax/cat/guide/free-property-loans.html

Given its a 5 bedroom house in a desirable area, this would likely exceeded the annual 3k per person CAT exemption mentioned above.

Yeah but the mother would be living rent free in their 3 bed in the same area. The rent differential can easily fall under the annual limits, especially given the 5 bed is in bad shape compared to the 3 bed. Honestly this will be doable with no tax liability and no funny business.

Del2005

murphaph wrote: »

Yeah but the mother would be living rent free in their 3 bed in the same area. The rent differential can easily fall under the annual limits, especially given the 5 bed is in bad shape compared to the 3 bed. Honestly this will be doable with no tax liability and no funny business.

You think revenue will give up 2 tax streams to get no tax. You don't get any tax breaks if you rent out your home and pay a rent or mortgage on a 2nd property. The mother will be required to pay rent to the other sibling on the new house, with the other sibling having to then pay tax on that income. Then the other sibling will have to pay rent on the family home to the mother, with the mother paying taxes on that income. If neither pay rent it'll or if they undervalue the rent on one property it'd be considered a gift.

It's an idea which lead to a family feud eventually.

Gael23

There would need to be a legal agreement as to what happens when th mother dies. I can foresee a situation where the occupying sibling challenges outright possession claiming it as their principal residence. I think it is possible but it needs to be done in writing through a solicitor.

Wabbit Ears

Id imagine you'd want all the siblings to sign waivers that they are in full agreement. TBH though this seems like a sure fire way of guarenteeing a massive fallout. I know that if my younger siblings had tried this with our family home there would have been war.

Mrs OBumble

Del2005 wrote: »

You think revenue will give up 2 tax streams to get no tax. You don't get any tax breaks if you rent out your home and pay a rent or mortgage on a 2nd property. The mother will be required to pay rent to the other sibling on the new house, with the other sibling having to then pay tax on that income. Then the other sibling will have to pay rent on the family home to the mother, with the mother paying taxes on that income. If neither pay rent it'll or if they undervalue the rent on one property it'd be considered a gift.

This is why someone suggested that specialist tax advice would be a good idea. I'm sure that this sort of swap happens in the agricultural sector, and that there must be tax provision for it there - which may extend to more urban situations, too.

The reality of the situation is that neither of them really would have an income from the house they own, and neither of them is giving a gift, either.

Water John

If the children are grown up and independent, why should they feel they have an entitlement to an inheritance? This is a general question and not simply about this family.
If the mother decides to leave her residence to the Cat Society, its her perogative.

murphaph

Del2005 wrote: »

You think revenue will give up 2 tax streams to get no tax. You don't get any tax breaks if you rent out your home and pay a rent or mortgage on a 2nd property. The mother will be required to pay rent to the other sibling on the new house, with the other sibling having to then pay tax on that income. Then the other sibling will have to pay rent on the family home to the mother, with the mother paying taxes on that income. If neither pay rent it'll or if they undervalue the rent on one property it'd be considered a gift.

There are 2 gifts here because nobody is paying rent. The difference between the gifts just has to be less than the annual limit from parent to child (category A) and there's no tax liability. It's not complicated but because of the other issues (like sibling laying claim to mother's house) it needs proper legal advice and needs to be watertight.

spaceHopper

Let's say the mother falls a breaks her hip, now the stairs are to much to manage, you can convert the down stairs of the larger house into a good living space. Or lets say she needs to go into a home, the larger house will get a better rent? Or say she applies for the fair deal scheme.

Lets say the heating system in the bigger house breaks down and needs to be replaced? Or they want to spend 30k bringing it up today's standards?

There are so many pit falls here I wouldn't do it. She is an elderly vulnerable Women living on her own.

Water John

Coming from a farm, I wouldn't be afraid of looking at diff options.
All the siblings should be got together. The mother should not be forced into any thing. All need to agree.
Letting things drift, as often happens is no solution either.

The example being, its always better to make a will than not make one.

The_Conductor

Mrs OBumble wrote: »

This is why someone suggested that specialist tax advice would be a good idea. I'm sure that this sort of swap happens in the agricultural sector, and that there must be tax provision for it there - which may extend to more urban situations, too.

The reality of the situation is that neither of them really would have an income from the house they own, and neither of them is giving a gift, either.

It does happen in an agricultural context, yes- however, there most certainly is no reciprochal arrangement in an urban / dwelling setting.

There was a scheme whereby you could transfer property (residential or otherwise) of a comparable value between parties- without triggering a tax demand from Revenue. This proposition was closed in 2001- and is highly unlikely to ever be revisited (there were some high profile cases in the media at the time- Revenue would rather schemes of that nature never darkened their doors ever again).

seamus

murphaph wrote: »

There are 2 gifts here because nobody is paying rent. The difference between the gifts just has to be less than the annual limit from parent to child (category A) and there's no tax liability. It's not complicated but because of the other issues (like sibling laying claim to mother's house) it needs proper legal advice and needs to be watertight.

The easiest way to not fall foul here is to pay stamp duty.

You declare the value of each house and the difference between the two becomes the gift.

So let's say mother's house (A) is declared @ €300k. Child's house (B) declared at €200k.

The properties are legally transferred, i.e. House A is purchased using house B + €100k cash. That €100k cash is a gift from mother to child.

Revenue take €5k in stamp duty, solicitor takes €1,500 in fees and everyone walks away happy that there are no residual tax issues outstanding and no confusion or arguments about who is entitled to what when mother passes away.

Actually, reading the OP here, the solution is more obvious than that. The child gives the mother their entire chunk of cash to purchase her house and the mother goes off and buys herself a property with that.

Seem very convoluted to go buy a property and then swap it.

The_Conductor

Seamus- up to the early noughties you could do this- but you can't anymore.
Both properties would have to be effectively sold- one cannot offset the purchase/sale price of the other- and both sales and purchases of properties would be treated wholly independently of one another.

To be perfectly honest- the whole setup is a recipe for family feuding for the next century- there are branches of families who have fallen out over far less than what is being proposed here.

If the mother cannot handle the upkeep of the principle property- put it on the open market- and get the best possible price for it. Let the younger son better this by 10k (or an agreed amount). Don't try to sell it in family- seriously, just don't go there.

Separately- let the mother buy an apartment/flat/retirement residence (whatever).

Do the whole lot to minimise overheads for the mother- somewhere without any maintenance would be ideal- possibly an apartment setting.

The fact that you don't want to sell the family home- you're emotionally attached to it- forget all this. Surely you've a greater emotional attachment to your Mum and your siblings than you do to a building? You need to think of that part of it.

Your brother wants to buy a bigger property- let him. It doesn't have to be the former family home. If the upkeep is so onerous- its entirely possible that it may be beyond his means to take care of it...........

You really need to remove the emotional attachment you have to your former family home and move on. I know its hard- but its what you need to do.

Water John

A good bit of sense there too, Conductor.

beauf

The_Conductor wrote: »

...Your brother wants to buy a bigger property- let him. It doesn't have to be the former family home. If the upkeep is so onerous- its entirely possible that it may be beyond his means to take care of it............

Might end up having to maintain both houses.