Inheritance tax threshold; is main residence relief included if gifted prior to death

justaforumname

My parents gifted me their main home in 2020 and my mother passed away at the end of 2022 and my father passed away 2024.

Aside from the main residence, the value of their savings and investments is about 700k. 

From reading up on this, they each with have an IHT threshold of 325k which can be combined, and this can increase by 175k each if the main residence is included, therefore increasing the overall threshold to 1 million. Without the main residence included this would be 650k.

My question is; is the main residence included if it was gifted within 2 years of my mother passing away and within 4 years of my father passing? The tapered relief doesn't apply, but does it count towards the overall estate and increase the overall threshold to 1 million? The main residence would be worth less than 200k.

SilverScroller

I believe the timeframe on this is 7 years so I believe the residence will be included (the 7-year rule) I'm sorry to say.

See www.gov.uk/inheritance-tax/gifts  for more information.

justaforumname

SilverScroller said:

I believe the timeframe on this is 7 years so I believe the residence will be included (the 7-year rule) I'm sorry to say.

Thanks for your feedback and I agree, but does that also mean that the 175k is added to each of my parents IHT allowance? The value of the main residence is about 160k.

Keep_pedalling

If your parents had that much in savings why on earth did the gift their home instead of some of those savings?
Assuming your parents continued to live there and were not paying you rent then the house would never fall out of their estate as it was a gift with reservation of benefit.

To answer your question, it is fortunate that they did not gift it a few years earlier as they would not have owned a home before the introduction on the RNRB, but in this case the downsizing rule allows the executors to claim your father’s RNRB band and part of the transferable RNRB from your mother’s estate. 

The full £1M is not available as the house is only worth £200k so the maximum exemption you have available is £850k so there will still be an IHT liability if the total value is £900k.

A full IHT return will be needed to be made before you can apply for probate, has anyone started this process yet? IHT need to be within 6 mounts of your father’s death.

justaforumname

Thanks Keep_pedalling. Most of the savings were investments which were also property. The plan had been to use those for their care, but it didn't get to that stage. I think I understand better following your explanation.

Basically, the maximum threshold for any married couple on their savings and investments (excluding their main residence) would be 650k?

The IHT is with the accountant and they have been trying to explain it, but I think I have a better understanding now.

Keep_pedalling

justaforumname said:

Thanks Keep_pedalling. Most of the savings were investments which were also property. The plan had been to use those for their care, but it didn't get to that stage. I think I understand better following your explanation.

Basically, the maximum threshold for any married couple on their savings and investments (excluding their main residence) would be 650k?

The IHT is with the accountant and they have been trying to explain it, but I think I have a better understanding now.

So if they had gifted you property investments it would have triggered immediate CGT issue for them. Had they invested a bit more in their own home you would have been able claim more in the form of RDNB which is reduced on any property worth less than £350k.

Unless this is your home as well you may have a CGT liability on the home if it has gained in value since it was gifted to you. 

mattojgb

There is a two year limit to claim the equivalent of the RNRB under the downsizing rules. I don't know how that applies when the first to die has died more than two years ago.

Keep_pedalling

mattojgb said:

There is a two year limit to claim the equivalent of the RNRB under the downsizing rules. I don't know how that applies when the first to die has died more than two years ago.

I am not aware of that 2 year rule, but the transferable RNRB is claimable regardless of when the first spouse died or even if they owned a home at the time.

mattojgb

If parents continued to live there it would likely be a gift with reservation of benefit. As such it doesn't count as a gift at all for IHT purposes.

buddy9

Assuming that the gifting of mother’s share of the house will have used some of her NRB, then the full transferable NRB will not be available.

Keep_pedalling

buddy9 said:

Assuming that the gifting of mother’s share of the house will have used some of her NRB, then the full transferable NRB will not be available.

Good point I had overlooked that. Assuming the house was worth £200k at the time it was gifted then it would reduce the amount of transferable NRB to £225k (the residential NRB is only usable after using up all of the  standard NRB) reducing the total NRB exemption to £550k, however father’s estate will only have half the house in it not all of it.

This also complicates the ability to use the RNRBs to the maximum value. My understanding of this unusual situation is that only £100k of father’s RNRB can be used and none of the transferable RNRB from mother’s estate. You might want to take professional advice on this one.

With hindsight this was not a great idea, it could never save IHT and may very well added £40k of IHT to father’s estate. If this was their accountant’s idea I hope you are not using the same one to do the IHT return.