IHT & Gifts

MartinW6

Hi all and thanks in advance for any advice given.

My mother moved in with us around 18 months ago.  She's now at the point where she wants to sell her house, and potentially pay off our mortgage.  My question is, if she were to gift us an amount from the sale (say £500,000 for simplicity) but then pass soon after, is that amount incorporated into her Inheritance Tax Threshold (which I believe is £650,000 due to couples allowance)?

I appreciate there are sliding scales for gifts from 7 > 0 years, an allowance of £3,000 and the IHT goes up if you pass on a property to a child.  My worry is that by gifting us £500,000 whilst she's alive it will fall outside of the IHT remit (because it's not part of her estate at the time of passing).  Or will it be included in the IHT when she passes?  I'm guessing the latter but this is obviously quite important and I don't want to assume anything!

Many thanks,

Martin.

Keep_pedalling

On a gift of £500k £325k would remain in her estate for 7 years. The remainder would also remain for 7 years but would be subject to taper relief. 

None of that applies if the plan is to pay off your mortgage and come to live with you as that would be considered a gift with reservation of benefit, and the 7 year rule would not kick in until she moved out. The other issue is deliberate deprivation of assets if she later needed residential care, how much would she be left with after the gift?

Is she a widow?

MartinW6

Hiya.

1) Yes, mum is a widow.  Dad passed in April 2014.  The total IHT is therefore £650k as I understand it.

2) "the 7 year rule would not kick in until she moved out."  I'm a little confused by this.  My mother has already moved out of her home and has been living with us for over a year.  She's currently renting out her home.  Does this constitute having 'moved out'?  If she has to actually sell the property to be considered having moved out, that's fine - she wouldn't gift us the money until that point anyway.

3) In terms of the amount left after the gift, all things considered, she'd be paying off a £250k mortgage and have around £450k left.

getmore4less

Gifts are generally in most cases IHT neutral, ie. they do create more tax they would have if not gifted.


First thing to look at is her nil rate band(NRB) and residential NRB(RNRB)

A  widow and as long as there was no reduction in her husbands £325k NRB she will have

£325k her NRB
£325k transferable NRB
£175k her RNRB
£175k transferable RNRB
£1m  Total. 

To use the full RNRB there needs to be qualifying interest in property(her house)  worth £350k(from what you say it is) and qualifying relative(you or siblings or grandkids...) 

if she sells her property then the downsizing rules apply(even if she bought something smaller) which should keep the RNRB at its full amount.

RNRB  does not require the relevant interest to be actual property as the time of death just assets going to a qualifying relative.

The next question is her estate over £1m? (and less than £2m)

if not IHT is unlikely anyway(under current rules).  

Definitely worth reading up on RNRB and downsizing now as you have to get it right to make the claims when the time comes.
(if she owned as a life interest trust, quite common scenario with a spouse death, that also needs considering.

my preference for reference is the IHT manual, there are other guides about..
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm46000


I would recommend a practice run of you mums IHT return by going through IHT400(and supplements) 




One strategy is she buys part of your property as that has become her home, this gives her more security.

If the part she buys is a reasonable proportion then there is no gift for that and further gifts would be outright without any gift with reservation issues which would set the 7 year clock running on those amounts.


.

Keep_pedalling

MartinW6 said:

Hiya.

1) Yes, mum is a widow.  Dad passed in April 2014.  The total IHT is therefore £650k as I understand it.

2) "the 7 year rule would not kick in until she moved out."  I'm a little confused by this.  My mother has already moved out of her home and has been living with us for over a year.  She's currently renting out her home.  Does this constitute having 'moved out'?  If she has to actually sell the property to be considered having moved out, that's fine - she wouldn't gift us the money until that point anyway.

3) In terms of the amount left after the gift, all things considered, she'd be paying off a £250k mortgage and have around £450k left.

When I said move out, I meant move out from your house. If you make a gift but continue to benefit from the gift the 7 year rule no longer applies. Usually this applies to people giving away their own homes but continue to live in them, but I believe this would apply here as well. This probably does not matter too much as it seems her estate is under the £1M threshold anyway.

With £450k left deliberate deprivation of assets is not going to be an issue. 

I agree with Getmore4less that her security is an important consideration (what happens to her if you pre decease her, get divorced or run into financial difficulties). One option is for her to buy into your house, the other is for her to provide you with an interest free lone secured with a charge against the house. The advantage of the second option is that house price inflation will not drive her estate into IHT territory. 

Do you have any siblings? 

MartinW6

Thank you both.

I'll certainly look into the idea of mum buying into our house for security.  Although she's 85, you never know what's round the corner.

With regards to the RNRB, I read somewhere that it only applies if the person died after 2016 (certainly what I read indicated that dad's estate - having passed in April 2014, wouldn't qualify).  However, that still leaves an IHT of £825,000 - which the house sale will definitely be under.

So, to clarify...

1) If mum pays off our mortgage at £250k, gifts are generally IHT neutral and this will not create more tax than if mum had kept it?

2) A gift of £250k would leave mum with roughly £450k making it unlikely that it's considered deliberate deprivation.

3) A final question - if mum sells the property but doesn't buy into ours (and doesn't buy a smaller property) are you saying her RNRB still remains intact?

Keep_pedalling

For a married couple it does not matter when the first death occurred as far as claiming the transferable RNRB is concerned. They may not have even owned their home at the time of death. As long as the second to dog died after April 2016 it is claimable.

it is still claimable is the second sells up to move into care, into sheltered accommodation or, as in her case, with close relatives.

The answer to all 3 questions is yes.