How do the new Inheritance Tax rules affect the 7 Year Gift Rule?
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NeddyHelpy
Posts: 5 Forumite
in Cutting tax
My wife and I have been gifted my mother and fathers main residence so the 7 year rule applies in that the house remains in their estate until after 7 years.
There is a sliding rule on the amount of tax to pay upon their death which is 0% after 7 years; at this point the house is outside their estate.
However, the new rules state that from 2021 a married couple potentially could leave their loved-ones a combined estate of up to £1m, without being liable for Inheritance Tax.
As the 7 year rule applies as the house is a 'gift without reservation' if both my parents unfortunately pass after April 2021 the house would still technically be in their estate but the new rules would apply so as long as the property is worth less than £1 Million we pay 0% inheritance Tax?
There is a sliding rule on the amount of tax to pay upon their death which is 0% after 7 years; at this point the house is outside their estate.
However, the new rules state that from 2021 a married couple potentially could leave their loved-ones a combined estate of up to £1m, without being liable for Inheritance Tax.
As the 7 year rule applies as the house is a 'gift without reservation' if both my parents unfortunately pass after April 2021 the house would still technically be in their estate but the new rules would apply so as long as the property is worth less than £1 Million we pay 0% inheritance Tax?
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The new rules supersede the 7 year rule in your case. However do you parents realise the consequences of their action? More problems than a seven year rule - and I don't understand you saying "if the house remains in their estate" they have just given it away. Is it their house or yours?0
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Unless your mother and father have considerable other assets, they have been extreamly foolish to give their major asset away.
Unless the property is worth over £650k then taper relief does not apply, as it only applies to gifts exceeding the nil rate band. If they are still using this property as their main residence then it will not even fall out of their estate after 7 years as it will be regarded as a gift with reservation.
If their joint total estate is over 650k then they have also blown the residential nil rate band allowances, which could reduce any eventual inheritance by up to £150k in additional IHT and on top of that you may find you have a CGT liability when the house is eventually sold.0 -
Did they take legal advice?
Where are they living?
What about CGT?June challenge £100 a day £3161.63 plus £350 vouchers plus £108.37 food/shopping saving
July challenge £50 a day. £ 1682.50/1550
October challenge £100 a day. £385/£31000 -
Do you own any other house? Or want to buy one?June challenge £100 a day £3161.63 plus £350 vouchers plus £108.37 food/shopping saving
July challenge £50 a day. £ 1682.50/1550
October challenge £100 a day. £385/£31000 -
Thank you for your replies to this complex question.
We did get advice before we did this. The original idea was to gift the property and then they live in it with us. Yes they pay rent at market rates and share bills. This means that the property was ‘a gift without reservation’ and that the 7 year rule applies. See here: www dot gov.uk/inheritance-tax/passing-on-home
So after 7 years the property will be outside of their ‘estate’ on death and therefore no IHT will be due. If they pass between 3 to 7 years before we are taxed on a sliding scale known as ‘taper relief’: see here www dot gov.uk/inheritance-tax/gift
However, as per my original question where do the new rules come into this? As the property is technically still in their ‘estate’ for the first 7 years?
(sorry about links, as I'm a newbie not allowed full URL's)0 -
Oh dear. Not sure what sort of advice you received.
Surely it would have been better for them to keep ownership, you to pay rent, them to declare tax on the rental income.
The lengths people go to try to avoid a bit of tax - mostly end up paying more.0 -
Taper relief only applies to any portion of a gift over their nil rate band, so if the house is worth £650k and they held equal shares in it taper release does not apply. If the house is worth £850k then taper relief applies on £200k the rest stays in their estate for 7 years un reduced.
Although the value of the house is still in their estate for IHT purposes, the primary residence nil rate band no longer applies as they no longer own their home. You also face a potencial double taxation issue over the next 7 years in that as well as IHT you could face a CGT liability when the house is sold
If this was done to reduce IHT then they really should have given away other assets, if this was done to avoid care costs, then there no time limit for a LA to claim deliberate deprivation of assets.
It seems the advice they received was very poor.0 -
Keep_pedalling wrote: »Taper relief only applies to any portion of a gift over their nil rate band, so if the house is worth £650k and they held equal shares in it taper release does not apply. If the house is worth £850k then taper relief applies on £200k the rest stays in their estate for 7 years un reduced.
Although the value of the house is still in their estate for IHT purposes, the primary residence nil rate band no longer applies as they no longer own their home. You also face a potencial double taxation issue over the next 7 years in that as well as IHT you could face a CGT liability when the house is sold
If this was done to reduce IHT then they really should have given away other assets, if this was done to avoid care costs, then there no time limit for a LA to claim deliberate deprivation of assets.
It seems the advice they received was very poor.
Exactly. Additionally the op and his wife also have to declare the 'market rent' income on their self-assessment. And, God forbid, what happens to the house if something was to happen to him and his wife?0 -
OK let!!!8217;s just break this down if we could.
The joint nil rate band is £650K as of now, so no IHT is payable up to this amount. So if the property has equity of £850K the amount of IHT payable right now if both die is £200K X 40% = £80,000 ?
The £200K outside the joint nil rate band of £650K has a reduced taper relief liability from year 4 to 7 after which the IHT will be 0%?
Where does the CGT come from?0 -
NeddyHelpy wrote: »OK let!!!8217;s just break this down if we could.
The joint nil rate band is £650K as of now, so no IHT is payable up to this amount. So if the property has equity of £850K the amount of IHT payable right now if both die is £200K X 40% = £80,000 ?
The £200K outside the joint nil rate band of £650K has a reduced taper relief liability from year 4 to 7 after which the IHT will be 0%?
Where does the CGT come from?
For couples who own their primary residence ,the current joint nil rate band is £650k plus £ 250k for the additional residence nil rate band.The additional nil rate band no longer applies to your parents as they do not own their primary residence.
Within 7 years the property may fall back into the estate for the purposes of IHT but it does not fall back into the estate for the purposes of inheritance -you cannot inherit something you already own.
If you are not living in the property then you would be liable for CGT on the increase in value from the date of acquisition.If you are living there as your primary residence,CGT does not arise.
https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band0
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