Inheritance Tax Gifts: Passing on your Home.

Inheritance tax: passing on your home.
Gifting your home to your relatives

Could passing on your home via an Inheritance Tax gift save your children a huge tax bill?

What are Inheritance Tax gifts?

Inheritance Tax is a tax charged on your estate when you pass away, but it can also be charged on transfers made during your lifetime.

There are various reliefs available on chargeable assets, which can reduce any tax liability that arises.

You could also gift certain assets before you pass away to reduce your estate, but only if certain conditions are met.

Passing on your home as an inheritance tax gift.

The nil rate band for Inheritance Tax (IHT)is £325,000 meaning any estate leftover this amount on your death is liable to IHT.

If you have an estate over this amount you could be thinking of gifting it to your children before you die so as not to incur an IHT charge.

For the gift to be outside of the estate and not fall under IHT, you must survive for at least 7 years after the date you make the gift.

If you continue to live in the property after you gift it, then this falls under Gift With Reservation (GWR), which means that the property would still be classed as part of the estate for IHT.

To not fall under GWR, the donor must pay what is known as “full consideration”, which means they must pay full market-rate rent for the time they live there.

If you do pay the full market rate of rent, then the property wouldn’t form part of the estate for IHT.

It may be worth obtaining an independent market rent valuation as proof for HMRC to show that the rent paid is the full market rate, and therefore the transfer is not GWR.

If the full market rent is not paid, then the whole gift will be treated as GWR and subject to IHT, even if partial rent was paid.

Inheritance calculator 2021

Anything else?

Whilst gifting the property to your children could save IHT, any rent they receive from you is taxable income for them so they will have to pay income tax on it.

It is also worth noting that the gifting of the home will count as a transfer for Capital Gains Tax (CGT) and so the donor could become liable for a charge at that point

However, if you have lived in the home, you could be entitled to Principal Private Residence Relief (PPRR), which would mean no CGT liability.

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