Inheritance tax & Gifts

loopa1

Hello
My understanding of inheritance tax & gifts is that it's possible to be gifted a home from your parents and as long as they live for at least 7 years after the home has been gifted, it avoids inheritance tax - is this correct?


If so, my second question is could my parents continue to live in this house and pay a market rent of say £500 per month (£6k per year) to the new owners (me and my sister) without attracting any kind of tax?


Third question: could both myself and my sister gift £3k each to my parents annually if we chose to do this?


And finally, could the combination of paying rent one way and giving cash gifts the other be seen as tax avoidance?


Thanks.

kidmugsy

loopa1 wrote: »

My understanding of inheritance tax & gifts is that it's possible to be gifted a home from your parents and as long as they live for at least 7 years after the home has been gifted, it avoids inheritance tax - is this correct?

Any gift, not just a house.

loopa1 wrote: »

my second question is could my parents continue to live in this house and pay a market rent of say £500 per month (£6k per year) to the new owners (me and my sister) without attracting any kind of tax?

Third question: could both myself and my sister gift £3k each to my parents annually if we chose to do this?

And finally, could the combination of paying rent one way and giving cash gifts the other be seen as tax avoidance?

It would be seen as an attempt at tax evasion i.e. you'd be in the soup. N.B. The taxman is not a b. fool.


It's very difficult to avoid IHT on a family house: it's pretty easy to arrange things so that you end up paying more tax. Beware.

zagfles

Yes, completely stupid plan. Very unlikely to avoid IHT, and if it does the parents might be liable for the "pre-owned assets" tax, plus you'd end up with a GCT bill for any increase in value of the house from when you took ownership.

A plan that is more likely to increase tax than reduce it!

Triumph13

And that's even before you add in the income tax you'd be paying on the rent. And of course your legal costs when you get nicked for tax evasion.

Daniel54

Additionally,market rent of £6k per annum suggests a property worth considerably less than the parents joint nil rate IHT allowance of £650k.Is IHT actaully an issue ?

For reasons not to do this,OP can add in deprivation of assets and the share of the parents'home being a marital asset in the case of divorce for either sibling

zagfles

Plus if either sibling lost their job and needed to claim benefits, the value of their share of the parents' house would count as capital which would disqualify them from means tested benefits. They'd be expected to "cash in" their capital to live on rather than claim benefits. So parents out on the street?

mania112

It's not a stupid plan (as quoted before me) -- but it needs tweaking/correcting.

For your parents to avoid IHT we are assuming their total assets are over £650k -- this therefore supposes that removing the property in question would reduce the estate to under £650k? (otherwise what would be the point?)

OK, so yes, they can give the property to you and after 7 years it's outside their estate.

Next thing, they can't live in it rent free. This would cause the property to remain in their estate because they're benefiting from it. They must pay a market rent. This in turn is income for the recipient and income tax is paid. You can utilise personal allowance so maybe your wife isn't working and has this £10k allowance - or your children if you want to be uber creative?

Either way, if you yourself are a basic rate taxpayer (and this income won't tip you over to higher) 20% tax on income is better than 40% on the property value.

Let's avoid talking about you gifting money to your parents, then things get messy from a technical tax position -- but, just do it and keep quiet about it. Giving them money doesn't need to be discussed in the same sentence as them paying you rent!

It's not straightforward, but perfectly possible.

Moreover, if your parents have an estate this big then one assumes they have cash/investments. There are easier ways to mitigate IHT with this.

mania112

^^ Hmmm... my comments are quite Laissez-faire (in every sense!) but let's not give the OP the impression he's stupid and will have to sell the property after his parents demise. There are certainly strategies to mitigate IHT.

Linton

What happens if one of the new owners dies? What happens if the parents want to move or maybe have to move because of disability?

A foolish idea for the parents in my view. And if it's bad for the parents the children shouldnt want to do it.

kidmugsy

mania112 wrote: »

Let's avoid talking about you gifting money to your parents, then things get messy from a technical tax position -- but, just do it and keep quiet about it. Giving them money doesn't need to be discussed in the same sentence as them paying you rent!
.

Once you start advocating lawbreaking, where do you stop? Wouldn't it be easier to defraud your employer than do all this fannying around about IHT? Or do some insurance frauds? Or stick up a jewellers? Or trade drugs?

zagfles

mania112 wrote: »

It's not a stupid plan (as quoted before me) -- but it needs tweaking/correcting.

For your parents to avoid IHT we are assuming their total assets are over £650k -- this therefore supposes that removing the property in question would reduce the estate to under £650k? (otherwise what would be the point?)

OK, so yes, they can give the property to you and after 7 years it's outside their estate.

Next thing, they can't live in it rent free. This would cause the property to remain in their estate because they're benefiting from it. They must pay a market rent. This in turn is income for the recipient and income tax is paid. You can utilise personal allowance so maybe your wife isn't working and has this £10k allowance - or your children if you want to be uber creative?

Either way, if you yourself are a basic rate taxpayer (and this income won't tip you over to higher) 20% tax on income is better than 40% on the property value.

Really? Plus POAT? Plus GCT?

Typical rental yields are around 5-7% of property value, charging the parents less than 1% would not be seen as anywhere near "market rent". It would be a gift with reservation or subject to POAT. And GCT would still be payable on top. And the value of the house would be regarded as capital if either of the kids lost their job and needed benefits.

If a true market rent of 5-7% is charged, after 20 years they've paid tax on the entire value of the house. Whereas IHT would give them 650k tax free. So assuming the house is worth a million, 40% tax on 350k is better than 20% on a million.

Plus they'd pay GCT on any increase in value of the house since they took ownership, probably mostly at 28%.

And the parents would risk losing their home if either of the kids lost their job.

Plus "gifting" the rent back would likely be seen as tax evasion.

Sounds pretty stupid to me still.