Reducing inheritance tax ideas

psychobubble

My mum has a house worth about 800k and wants to downsize and live with me (one of 3 siblings). She is 80 and wants to free up some equity that can be shared to her children and grandchildren without attracting IHT. I am planning on buying a house with extra plot to build on (or land with planning for 2 houses) and was wondering if it would make sense for her to sell her house and then invest with me (thereby using the downsizing allowance) as well so that we can minimise as a family the IHT bill. Her husband died 10 years ago and she bought her current house with the proceeds of their estate then. My siblings and I will get some tax advice but any other ideas or advice would be helpful! 

theoretica

If she inherited everything from her husband, and her total estate will be less than £1 million, there will probably be no inheritance tax to pay, even without complicating things.

psychobubble

Thanks! She inherited 50% of the estate as he left 50% to his own children so not sure how much of his unused allowance would be passed over 

Marcon

psychobubble said:

Thanks! She inherited 50% of the estate as he left 50% to his own children so not sure how much of his unused allowance would be passed over 

Depends how much the estate was worth. If it was over the IHT threshold, then there's no unused portion of the nil rate band to pass over.

The Residence Nil Rate Band didn't exist 10 years ago, so by definition none of this could have been used on the death of her husband, so 100% of that is available now.

psychobubble

Thanks yes I think it was over the IHT threshold at the time…so therefore as the Residence nil rate band didn’t exist there would be double the £325000 allowance so £650000 threshold? 

Marcon

psychobubble said:

Thanks yes I think it was over the IHT threshold at the time…so therefore as the Residence nil rate band didn’t exist there would be double the £325000 allowance so £650000 threshold? 

No, not double the £325K if some or all of the husband's nil rate band was used at the time of his death - there may not be any to transfer.

Assuming the husband used his full £325K NRB at the time he died, it will be a maximum of:

• your mother's NRB of £325K
• + 2 x the RNRB of £175K
• so £325K + (2 x £175K) = £675K.

See https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band

theoretica

In 2010, the nil rate band was £325k, as now.  If he left that much, or more, to anyone other than his wife it will have used up the whole nil rate band - if he left less than that to other people some of the nil rate band will still be available.

In case it is relevant - If someone has been widowed more than once they can not accumulate more than double the single person's nil rate bands.

psychobubble

Thank you for clarifying this for me. I really appreciate it

Albermarle

To go back to the original question , you can not just avoid IHT , by giving money away . Unless she survives seven years after the gift was made. Depending on the exact situation , it could be possible that some of any IHT bill will need to be paid for by the recipients, rather than her.
On the other hand if she wants to downsize and give some of the proceeds to you , it will not actually increase  any IHT bills.

zagfles

Also google POAT which may apply

Keep_pedalling

psychobubble said:

Thanks yes I think it was over the IHT threshold at the time…so therefore as the Residence nil rate band didn’t exist there would be double the £325000 allowance so £650000 threshold? 

If he gave over £325k away then there would have been IHT to pay, it would also mean your mother’s estate would exceed £1M. 

You need to look at the probate records for your father to see what allowance is transferable, if any.

As for downsizing and gifting then as long as she is not giving too much away then this is a good idea. Even if she does not survive 7 years she will get to see some of her money being put to good use in her lifetime, and although it might not save any IHT it won’t result in any extra tax.