Inheritance tax advice??

Macka09

Hi folks
A family member was advised that they would avoid paying inheritance tax by gifting there house to there child if it was done 7years before her passing. 

They’ve now come to realise that because they still live in the house this may not be the case. 

Who is the best person to talk to regarding these kind of affairs?

They have been advised previously by accountants and solicitors regarding this situation and now all panic is setting in. 

elsien

If it was a straightforwards gift it is not exempt from inheritance tax because it is a gift with reservation of benefit, presuming they haven't stuck it in some sort of trust or been paying a full market rent. The good news for the family member is that they don't pay inheritance tax, the beneficiary does.  

It probably also wasn't the most sensible thing to do anyway because they are stuck there now and if they want to downsize or move to a more accessible property then they will be unable to do so unless they have substantial other assets. Although it's done now so they will have to live with any consequences.

Was inheritance tax the only reason for the gift?

JGB1955

elsien said:

If it was a straightforwards gift it is not exempt from inheritance tax because it is a gift with reservation of benefit, presuming they haven't stuck it in some sort of trust or been paying a full market rent. The good news for the family member is that they don't pay inheritance tax, the beneficiary does.  

It probably also wasn't the most sensible thing to do anyway because they are stuck there now and if they want to downsize or move to a more accessible property then they will be unable to do so unless they have substantial other assets. Although it's done now so they will have to live with any consequences.

Was inheritance tax the only reason for the gift?

Is that right?  I thought the estate pays IHT.

SciroccoPete

Usually a solicitor would be the best person to talk to, although if it was a solicitor who advised them originally, I would go to a different firm.

Inheritance tax rules state that if you make a gift but retain a benefit from the property or item gifted, the value is still regarded as part of your estate in calculating the inheritance tax liability.

Although the nil rate band (the first £325,000 which is exempt from inheritance tax) has not changed for a good number of years, a residence nil rate band was introduced in 2017 (£175,000 now).

Putting it simply, if an individual leaves a house (they must have lived in it) to direct descendants, the first £500,000 could be tax free, or on the second death of a couple, £1,000,000 could be tax free.

If the house was gifted after April 2017, then it could be a double whammy - still taxed on death and no tax free £175,000.

Keep_pedalling

I presume the person to advise them to do this was some guy down the pub or some other equally unqualified person so there won’t be any comeback on the ‘advisor’.

How long ago did the transfer happen & what is the value of the home? Gifting is a good way to potentially reduce an IHT liability but not when the gift is your home. People who do this often have a poor understanding of IHT exemptions and have an estate that would not be subject to IHT in the first place. If her total assets including the house are worth less than £500k then there will be no IHT if the house is worth at least £175k but it could be twice that if she is a widow.

Unless the child actually lives in the home then any sale or transfer of the home back to the mother is liable to carry a capital gains tax liability especially if the transfer took place some time ago. If the house was actually given away prior to the introduction of residential NRB this could actually increase the amount of IHT as that exemption cannot be claimed.

Undoing this mess is going to be tricky, they probably should get professional advice from a tax specialist.  

elsien

JGB1955 said:

elsien said:

If it was a straightforwards gift it is not exempt from inheritance tax because it is a gift with reservation of benefit, presuming they haven't stuck it in some sort of trust or been paying a full market rent. The good news for the family member is that they don't pay inheritance tax, the beneficiary does.  

It probably also wasn't the most sensible thing to do anyway because they are stuck there now and if they want to downsize or move to a more accessible property then they will be unable to do so unless they have substantial other assets. Although it's done now so they will have to live with any consequences.

Was inheritance tax the only reason for the gift?

Is that right?  I thought the estate pays IHT.

I meant that the family member won't be paying the tax because they'll have shuffled off this mortal coil so they will be past caring anyway. 
 

Macka09

It certainly wasn’t someone from down the pub who advised them. From my understanding, at least 2 paid professionals advised them that this would be the best way to do things. 

I believe the house to be worth £220k at this current time. It would have been handed over before the 2017 date. 

One of the reasons for this route being taken is because the elderly mother was left another property which is rented out and her own house was then gifted to the daughter. 

The elderly mother is a widow of 20 years but I’m unsure whether that has any bearing on anything. 

They’ve completely lost trust with the tax advisors and solicitors and don’t know where to turn to. 

Marcon

Macka09 said:

It certainly wasn’t someone from down the pub who advised them. From my understanding, at least 2 paid professionals advised them that this would be the best way to do things. 

I believe the house to be worth £220k at this current time. It would have been handed over before the 2017 date. 

One of the reasons for this route being taken is because the elderly mother was left another property which is rented out and her own house was then gifted to the daughter. 

The elderly mother is a widow of 20 years but I’m unsure whether that has any bearing on anything. 

They’ve completely lost trust with the tax advisors and solicitors and don’t know where to turn to. 

What a mess. It's hard to believe that one qualified and experienced adviser could come up with such a pig's ear of an outcome, let alone two. Something doesn't add up here, and I don't just mean the tax! I wonder exactly what these advisers were told/asked to achieve - for instance, did a discussion about avoiding possible care home fees feature...? Has she gone back to them to challenge their advice, based on her new level of understanding?

Has the mother ever lived in the house which is rented out? Did she inherit 'everything' when her husband died 20 years ago (ie none of his nil rate band was used)? Is the rental property classed as her main residence, or has it ever been classed as such?

Keep_pedalling

I hope they did not pay too much for that ‘professional’ advice because it was poor advice unless it was made prior to 1986 when you could indeed do this.

Assuming it was after 1986 then the house remains in her estate for IHT purposes only. The information about her being a widow is important because if her husband left everything to her, his nil rate band can be transferred to her estate giving a total exemption of £650k, so if her remaining assets do not exceed £430k it will not be subject to IHT.

If the net worth is above that then the simplest thing to avoid / reduce IHT would be for her move to a property she owns as that would allow the estate to claim the residential NRBs to be claimed as well which could give her estate up to £1M of exemptions.

As it seems the transfer happened a good few years ago the sale of the current home will attract a CGT liability for her child, unless that child is also living there.

Olinda99

yes sadly because the child owns it then when she finally sells it she will be liable for capital gains tax on the difference between the sale price and the market value when transferred -  less expenses.

if it had not been transferred then it would have remained the mother's main residence and would have been cgt-free

because the mother is living there it will be not be taken out of the mother's estate so will be liable for inheritance tax although obviously there is an iht allowance the estate can claim

bobster2

As many have pointed out - this was unwise - particularly since the person concerns owns a rental property which means the estate could be getting into IHT territory.

But it could have been worse...the reservation of benefit might mean the RNRB can be used after all...

https://techzone.abrdn.com/public/iht-est-plan/residence-nil-rate-band-guide

If the home is gifted but the owner still lives there rent free, this is normally a gift with reservation of benefit (GWR). A person’s estate on death includes the value of property subject to a reservation of benefit (GWR). For the purposes of the RNRB the gift is still regarded as a transfer on death and therefore eligible for the RNRB, provided the home goes to direct descendants.