please can you help me regarding IHT

Murphy_The_Cat

About 3 1/2 years ago my friends Mum gave her house to her son (my friend).

Unfortunately my friends Mum is terminally ill and is not expected to live much longer. The house that was gifted to my friend has been recently valued at £395000 and they are now terrified that they will have to sell the house to pay the death duties / IHT. Can anyone let me know what the tax situation is, and if they are liable for tax , roughly how much ? and is this payable before or after the will is read and how quickly would they have to pay it.

Thanks

MTC

p.s if a similar question to this has been asked recently - sorry.

reddevilled

Sorry to hear about your mate's mum.

If a gift is made within the last seven years it is included in the IHT calculation on death. Broadly speaking your mate will have to pay 40% on the excess over the nil rate band. Therefore 395000 - 275000 = 120000 * 40% = 48000 is payable. However, once the transferor has survived three years, this amount is tapered by the following amounts.

Survivorship Amount charged
3-4 yrs 80%
4-5 yrs 60%
5-6 yrs 40%
6-7 yrs 20%

Therefore at the moment approx 48000 x 80% = 38400 will be payable.

Also, the rest of her estate will be charged at a flat 40% as no nil band will be remaining.

Please note that i have assumed she made no other gifts in the last seven years. The figures will also be slightly different as she may have an annual exemption available, but for the purposes of estimating IHT the above figures should be ok.

It may be worth your mate looking into an insurance policy to cover the potential IHT, although if his mum is terminally ill this may be v expensive / not available.

Hope this helps,

Red

nlpnlp

One point to bear in mind is that the property will be valued at the date of gift not its current valuation. The way property prices have been going up this could be substantially lower than the current value and within the current IHT threshhold of £275,000.

One potential problem is if your friends mother has remained living in the property since gift. This could well lead to a gift with reservation. Your friends mother would in fact need to pay the full rentable value to avoid reservation of benefit. If this is in fact what has happened I would recommend that your friend and mother look at getting some professional advice.

sneekymum

Sorry to hear about this sad situation.

Here's an IHT-avoidance plan - I'm totally unqualified in this field & I just dreamed it up so do take proper advice before following any of my strange ideas...

1. Get your friend to give the house back - the pre-owned assets rules mean that unless mum's been paying a market rent to live there there will be no taper relief and its like the gift never happened. Except that the Inland Revenue might still want Capital Gains Tax on any growth....

2. Next get friend to raise a £120,000 mortgage and buy a share in the house. The share should be a proportion at the true market value.

3. Mum will be able to use this money to pay a market rent (for use of the portion of house she doesn't own) and avoid any question of pre-owned assets benefit.

4. Friend must declare this rent on a tax return and probably pay income tax on it.

5. Upon mum's passing there would be no tax to pay as her share of the house would only be worth £275,000.

The above assumes that house prices don't rocket in the coming months and also that mum has made other substantial gifts in the last seven years.

If mum really isn't going to live many years then its worth taking action to avoid a £48,000 bill - especially if friend doesn't have the money to pay it. He might try running this idea past his solicitor...

Murphy_The_Cat

Hi all

thanks for all of your advice & good wishes. Sadly it looks like events are going to take over the situation and my mates mum is only going to survive days/weeks rather than months/years.

With such a short time left (& bearing in mind her health) I think that to follow sneekymums suggestions (really good as they are) will be to distressing & that they will have to wait for the inevitable to happen & then pay for some professional advice.

Once again thanks for the help

MTC

sneekymum

It might not be too late to charge rent and benefit from that £10,000 taper relief.

DavidLaGuardia

Yes the IHT will be leivied on the value of the house at the time it was gifted, but taper relief applies to the excess over the personal allowance at the TIME of the gift (assuming there were no other gifts).

Murphy_The_Cat

a quick update for those people who were kind enough to help - my mates Mum sadly died today.

MTC