Avoiding Inheritance Tax on property
Discussion
(Obviously I will speak to a professional but thought I would ask here first)
Apparently if you inherit property from a parent there is a £175,000 exemption on top of the £325,000 IHT threshold, giving £500k tax free.
Lets say a parent and a child jointly own a property worth £1m (easy number for calculations).
Does this mean the child pays no IHT tax because they inherited only 50% of the £1m house and they get £500k tax free anyway?
Apparently if you inherit property from a parent there is a £175,000 exemption on top of the £325,000 IHT threshold, giving £500k tax free.
Lets say a parent and a child jointly own a property worth £1m (easy number for calculations).
Does this mean the child pays no IHT tax because they inherited only 50% of the £1m house and they get £500k tax free anyway?
Strictly speaking it's the estate that pays the IHT. If the parent only owned half the property, that's the value that gets included in the IHT calcs.
If you are thinking of doing things to avoid the tax being due, then I'd suggest a measure of caution is needed as HMRC are quite wise to things like gifts.
Also if it's a second property (to you) that you then sell, you have s lovely CGT liability.
Bert
If you are thinking of doing things to avoid the tax being due, then I'd suggest a measure of caution is needed as HMRC are quite wise to things like gifts.
Also if it's a second property (to you) that you then sell, you have s lovely CGT liability.
Bert
aston80 said:
Apparently if you inherit property from a parent there is a £175,000 exemption on top of the £325,000 IHT threshold, giving £500k tax free.
I’ve never heard it expressed like that, but I do remember that the solicitor I used while doing probate for my late father’s estate did apply a percentage write-down to the value of Dad’s house (something like 15% or thereabouts). Unfortunately I can’t remember what that relief was called, but it saved a fair chunk of IHT and meant that the solicitor had paid for his fee twice over.If you’re looking for ways to side-step IHT, don’t fall into the trap of getting your parent(s) to gift you the house in the hope that they survive seven years and outlive the IHT taper relief period. This is a waste of a solicitor’s fee. If they continue to live rent-free in the house after gifting it to you, this is called a “gift with reservation of benefit”, and the house is treated as if it remained in their estate - so IHT would apply anyway.
My father did precisely this with his mother and her property. I do wonder about the ethical position of the solicitor who took a fee for facilitating that, without pointing out the futility of it.
Edited by Dr Mike Oxgreen on Friday 18th December 09:43
Trying to avoid IHT on a primary residence is a bit fraught - most of the “schemes” leave the parent very vulnerable to a change in circumstances, either them running out of money or you dying first and your spouse not being as nice as you are. We’ve avoided them for precisely this reason.
Gifts can help, but you have to plan well in advance, and there is likely to be CGT liability on the way in. For example, say you are given 50% of the house today. HMRC will demand a CGT payment on that 50% of the house (if not primary residence) at market value from your parent, even if no money changed hands. If your parent dies in the next 3 years, you really lose, as you get whacked for full IHT. 3 - 7 years, the IHT due drops in percentage terms down to zero, which is good, but the size of the gift is does not decline. This is really important: say your parent gives you 50% of the house (say 0.5m) and survives 6 years. The IHT payable on that gift is 10% or whatever ... but the 0.5m still counts towards the IHT free allowance. So in the worst circumstance, you pay CGT on the way in, they live for 4 years, you pay nearly full IHT on the way out and you burn the allowance.
Gifts where you actually buy the asset off the parent are less fraught, but you then have to find the money, and they then have to get rid of the money, or they will just be taxed at full IHT rates on cash in their bank account. Clever sale and lease back comes into this: they sell the house to you, you pay real money for it, and they pay you the money back in rent. The challenge there for primary residence is two fold:
- They might run out of money
- If you get run over by a bus, whoever inherits your position may be less pleasant than you. As our solicitor said - you trust your kids to do the right thing by their grandmother right now, but are you 100% sure that in 5 years one of them is not a junkie who will make her homeless for the next fix.
It really helps if you can talk openly to your parent(s) about this. For example, I’ve just spent some money on a car for my mother. It was going to be a present, but she is insisting on paying for it because “if I drop dead tomorrow, that’s another bit of cash out of my bank account that you won’t need to pay tax on”.
TL;DR - it is difficult but possible - take decent advice.
Gifts can help, but you have to plan well in advance, and there is likely to be CGT liability on the way in. For example, say you are given 50% of the house today. HMRC will demand a CGT payment on that 50% of the house (if not primary residence) at market value from your parent, even if no money changed hands. If your parent dies in the next 3 years, you really lose, as you get whacked for full IHT. 3 - 7 years, the IHT due drops in percentage terms down to zero, which is good, but the size of the gift is does not decline. This is really important: say your parent gives you 50% of the house (say 0.5m) and survives 6 years. The IHT payable on that gift is 10% or whatever ... but the 0.5m still counts towards the IHT free allowance. So in the worst circumstance, you pay CGT on the way in, they live for 4 years, you pay nearly full IHT on the way out and you burn the allowance.
Gifts where you actually buy the asset off the parent are less fraught, but you then have to find the money, and they then have to get rid of the money, or they will just be taxed at full IHT rates on cash in their bank account. Clever sale and lease back comes into this: they sell the house to you, you pay real money for it, and they pay you the money back in rent. The challenge there for primary residence is two fold:
- They might run out of money
- If you get run over by a bus, whoever inherits your position may be less pleasant than you. As our solicitor said - you trust your kids to do the right thing by their grandmother right now, but are you 100% sure that in 5 years one of them is not a junkie who will make her homeless for the next fix.
It really helps if you can talk openly to your parent(s) about this. For example, I’ve just spent some money on a car for my mother. It was going to be a present, but she is insisting on paying for it because “if I drop dead tomorrow, that’s another bit of cash out of my bank account that you won’t need to pay tax on”.
TL;DR - it is difficult but possible - take decent advice.
Edited by rxe on Friday 18th December 10:31
BertBert said:
Strictly speaking it's the estate that pays the IHT. If the parent only owned half the property, that's the value that gets included in the IHT calcs.
If you are thinking of doing things to avoid the tax being due, then I'd suggest a measure of caution is needed as HMRC are quite wise to things like gifts.
Also if it's a second property (to you) that you then sell, you have s lovely CGT liability.
Bert
Just to add to what Bert said and to clarify this, in the real world there usually isn't any CGT to pay on an inherited property. For the vast majority of people who inherit and then sell pretty much straightaway to realise the cash, there is unlikely to be a any difference between the value at death and the value when sold so it will not attract any CGT liability.If you are thinking of doing things to avoid the tax being due, then I'd suggest a measure of caution is needed as HMRC are quite wise to things like gifts.
Also if it's a second property (to you) that you then sell, you have s lovely CGT liability.
Bert
If you chose not to sell and keep it as a second property for rental etc then the normal CGT rules would apply when sold
I think the situation gets a bit more complicated if you inherit a home that is already a second home within the deceased's assets and not their primary residence, but i'm not an accountant.
martinbiz said:
BertBert said:
Strictly speaking it's the estate that pays the IHT. If the parent only owned half the property, that's the value that gets included in the IHT calcs.
If you are thinking of doing things to avoid the tax being due, then I'd suggest a measure of caution is needed as HMRC are quite wise to things like gifts.
Also if it's a second property (to you) that you then sell, you have s lovely CGT liability.
Bert
Just to add to what Bert said and to clarify this, in the real world there usually isn't any CGT to pay on an inherited property. For the vast majority of people who inherit and then sell pretty much straightaway to realise the cash, there is unlikely to be a any difference between the value at death and the value when sold so it will not attract any CGT liability.If you are thinking of doing things to avoid the tax being due, then I'd suggest a measure of caution is needed as HMRC are quite wise to things like gifts.
Also if it's a second property (to you) that you then sell, you have s lovely CGT liability.
Bert
If you chose not to sell and keep it as a second property for rental etc then the normal CGT rules would apply when sold
I think the situation gets a bit more complicated if you inherit a home that is already a second home within the deceased's assets and not their primary residence, but i'm not an accountant.
martinbiz said:
BertBert said:
Strictly speaking it's the estate that pays the IHT. If the parent only owned half the property, that's the value that gets included in the IHT calcs.
If you are thinking of doing things to avoid the tax being due, then I'd suggest a measure of caution is needed as HMRC are quite wise to things like gifts.
Also if it's a second property (to you) that you then sell, you have s lovely CGT liability.
Bert
Just to add to what Bert said and to clarify this, in the real world there usually isn't any CGT to pay on an inherited property. For the vast majority of people who inherit and then sell pretty much straightaway to realise the cash, there is unlikely to be a any difference between the value at death and the value when sold so it will not attract any CGT liability.If you are thinking of doing things to avoid the tax being due, then I'd suggest a measure of caution is needed as HMRC are quite wise to things like gifts.
Also if it's a second property (to you) that you then sell, you have s lovely CGT liability.
Bert
If you chose not to sell and keep it as a second property for rental etc then the normal CGT rules would apply when sold
I think the situation gets a bit more complicated if you inherit a home that is already a second home within the deceased's assets and not their primary residence, but i'm not an accountant.
I know a couple who have inherited a former rental property. This was valued and IHT etc. paid on the total estate.
With Covid it has taken a while to sort IHT and get Probate but they do intend to sell the property. The value has risen in the interim period.
Also if the property gets transferred into both names (as per-the will) can they both utilise their CGT allowance so get a double allowance.
over_the_hill said:
Would CGT be paid on the difference between the death value and sale value or the total value.
I know a couple who have inherited a former rental property. This was valued and IHT etc. paid on the total estate.
With Covid it has taken a while to sort IHT and get Probate but they do intend to sell the property. The value has risen in the interim period.
Also if the property gets transferred into both names (as per-the will) can they both utilise their CGT allowance so get a double allowance.
CGT is paid only on any gain made, hence the name. If the property was inherited and ownership transfered equally between 2 people and neither was using it as a primary home, then indeed they would both be able to use their separate CGT allowances against profit made on the sale, so each individual share of the profit would need to exceed £12,300 before incurring any tax liability, assuming of course that none of that allowance is being used elsewhere.I know a couple who have inherited a former rental property. This was valued and IHT etc. paid on the total estate.
With Covid it has taken a while to sort IHT and get Probate but they do intend to sell the property. The value has risen in the interim period.
Also if the property gets transferred into both names (as per-the will) can they both utilise their CGT allowance so get a double allowance.
so as an example:
Propery gets valued at £500,000 at time of death, 2 beneficiaries jointly inherit the house and have it transfered equally into their names. Property gets sold 5 years later for £600,000, selling, maintenance and legal costs of £20,000 are incurred and offset leaving a total gain of £80,000 less the 2 allowances of £24,600 leaving a joint taxable gain of £55,400 the tax on this will vary depending on someones individual financial circumstances, but for basic rate tax payers 18%, 28% for higher or additional rate payers
There also used to be another allowance (indexation allowance) against CGT to offset some of the rises in assets due to inflation, but that was stopped in 2017 IIRC. The government taketh away with one hand and then taketh away with the other!
martinbiz said:
CGT is paid only on any gain made, hence the name. If the property was inherited and ownership transfered equally between 2 people and neither was using it as a primary home, then indeed they would both be able to use their separate CGT allowances against profit made on the sale, so each individual share of the profit would need to exceed £12,300 before incurring any tax liability, assuming of course that none of that allowance is being used elsewhere.
so as an example:
Propery gets valued at £500,000 at time of death, 2 beneficiaries jointly inherit the house and have it transfered equally into their names. Property gets sold 5 years later for £600,000, selling, maintenance and legal costs of £20,000 are incurred and offset leaving a total gain of £80,000 less the 2 allowances of £24,600 leaving a joint taxable gain of £55,400 the tax on this will vary depending on someones individual financial circumstances, but for basic rate tax payers 18%, 28% for higher or additional rate payers
There also used to be another allowance (indexation allowance) against CGT to offset some of the rises in assets due to inflation, but that was stopped in 2017 IIRC. The government taketh away with one hand and then taketh away with the other!
The OP was talking about a house where he already owns half. So there would be CGT on the existing half he owns if it was a second property. This seems to have got lost in the discussion, but is highly relevant, especially when giving examples. so as an example:
Propery gets valued at £500,000 at time of death, 2 beneficiaries jointly inherit the house and have it transfered equally into their names. Property gets sold 5 years later for £600,000, selling, maintenance and legal costs of £20,000 are incurred and offset leaving a total gain of £80,000 less the 2 allowances of £24,600 leaving a joint taxable gain of £55,400 the tax on this will vary depending on someones individual financial circumstances, but for basic rate tax payers 18%, 28% for higher or additional rate payers
There also used to be another allowance (indexation allowance) against CGT to offset some of the rises in assets due to inflation, but that was stopped in 2017 IIRC. The government taketh away with one hand and then taketh away with the other!
We don’t know when he bought, the existing half, or what it’s purchase value was, but the difference between that and the selling price of £1.2m (£600k x 2 using your numbers) matters a lot. Your example would need this adding onto the gain to show a real life CGT liability, which could be quite significant.
unident said:
martinbiz said:
BertBert said:
Strictly speaking it's the estate that pays the IHT. If the parent only owned half the property, that's the value that gets included in the IHT calcs.
If you are thinking of doing things to avoid the tax being due, then I'd suggest a measure of caution is needed as HMRC are quite wise to things like gifts.
Also if it's a second property (to you) that you then sell, you have s lovely CGT liability.
Bert
Just to add to what Bert said and to clarify this, in the real world there usually isn't any CGT to pay on an inherited property. For the vast majority of people who inherit and then sell pretty much straightaway to realise the cash, there is unlikely to be a any difference between the value at death and the value when sold so it will not attract any CGT liability.If you are thinking of doing things to avoid the tax being due, then I'd suggest a measure of caution is needed as HMRC are quite wise to things like gifts.
Also if it's a second property (to you) that you then sell, you have s lovely CGT liability.
Bert
If you chose not to sell and keep it as a second property for rental etc then the normal CGT rules would apply when sold
I think the situation gets a bit more complicated if you inherit a home that is already a second home within the deceased's assets and not their primary residence, but i'm not an accountant.
unident said:
martinbiz said:
CGT is paid only on any gain made, hence the name. If the property was inherited and ownership transfered equally between 2 people and neither was using it as a primary home, then indeed they would both be able to use their separate CGT allowances against profit made on the sale, so each individual share of the profit would need to exceed £12,300 before incurring any tax liability, assuming of course that none of that allowance is being used elsewhere.
so as an example:
Propery gets valued at £500,000 at time of death, 2 beneficiaries jointly inherit the house and have it transfered equally into their names. Property gets sold 5 years later for £600,000, selling, maintenance and legal costs of £20,000 are incurred and offset leaving a total gain of £80,000 less the 2 allowances of £24,600 leaving a joint taxable gain of £55,400 the tax on this will vary depending on someones individual financial circumstances, but for basic rate tax payers 18%, 28% for higher or additional rate payers
There also used to be another allowance (indexation allowance) against CGT to offset some of the rises in assets due to inflation, but that was stopped in 2017 IIRC. The government taketh away with one hand and then taketh away with the other!
The OP was talking about a house where he already owns half. So there would be CGT on the existing half he owns if it was a second property. This seems to have got lost in the discussion, but is highly relevant, especially when giving examples. so as an example:
Propery gets valued at £500,000 at time of death, 2 beneficiaries jointly inherit the house and have it transfered equally into their names. Property gets sold 5 years later for £600,000, selling, maintenance and legal costs of £20,000 are incurred and offset leaving a total gain of £80,000 less the 2 allowances of £24,600 leaving a joint taxable gain of £55,400 the tax on this will vary depending on someones individual financial circumstances, but for basic rate tax payers 18%, 28% for higher or additional rate payers
There also used to be another allowance (indexation allowance) against CGT to offset some of the rises in assets due to inflation, but that was stopped in 2017 IIRC. The government taketh away with one hand and then taketh away with the other!
We don’t know when he bought, the existing half, or what it’s purchase value was, but the difference between that and the selling price of £1.2m (£600k x 2 using your numbers) matters a lot. Your example would need this adding onto the gain to show a real life CGT liability, which could be quite significant.
martinbiz said:
I don't think anything has been lost in the discussion, but I think you are getting a bit lost in the thread, the OP's post did not mention CGT, his question was about IT, if you look at your post above I think you are getting confused between the two. My post first post was to add to Berts already correct post and was not even directed at the OP, hence I quoted Bert and the second post was to answer the question asked by over the hill regarding the potential CGT implications, again not directed at the OP, hence again I quoted his post not the OP's in my reply
I’m not getting confused. If you’re going to give examples then you should at least make it relevant to what the initial situation was. The OP may not have mentioned CGT, but he did mention he already owns half of the property being discussed. BertBert (aka BertBset due to fat fingers) mentioned CGT and it was about the existing half of the property owned before the inheritance.
Sorry if my CGT comment wasn't very helpful. It seemed to me that the OP might have been looking for ways to change the current IHT situation by becoming a 50% house owner. So I was mentioning the CGT situation if it was a second home.
And I didn't know that you have to pay the CGT on property very quickly, like within 30 days. Not a year next January! Fortunately someone who did know put me right!
Right sorry for the diversion.
And I didn't know that you have to pay the CGT on property very quickly, like within 30 days. Not a year next January! Fortunately someone who did know put me right!
Right sorry for the diversion.
aston80 said:
(Obviously I will speak to a professional but thought I would ask here first)
Apparently if you inherit property from a parent there is a £175,000 exemption on top of the £325,000 IHT threshold, giving £500k tax free.
Lets say a parent and a child jointly own a property worth £1m (easy number for calculations).
Does this mean the child pays no IHT tax because they inherited only 50% of the £1m house and they get £500k tax free anyway?
You do need to take professional advice and discuss with your parents. Your description above is correct but as another poster says it's the estate which pays the IHT. Apparently if you inherit property from a parent there is a £175,000 exemption on top of the £325,000 IHT threshold, giving £500k tax free.
Lets say a parent and a child jointly own a property worth £1m (easy number for calculations).
Does this mean the child pays no IHT tax because they inherited only 50% of the £1m house and they get £500k tax free anyway?
The problem is what happens after the first death. If the remaining parent wants to live in the house they will have to pay you rent and any gain on your half will create a CGT liability for you.
It's best if the remaining parent is willing to move and you can sell and you receive your inheritance. The problem is some may not want to move and even if they are prepare to move they may not have sufficient funds.
BertBert said:
I don't understand that a advice at all. Why would a parent have to pay rent? And why would it be better to move?
Because the Inland Revenue are wise to this. If your parents “give” you their house and continue to live in it, the IR will simple state that the transaction didn’t happen, and that all you were doing was avoiding tax. The only defence is for your parents to pay a realistic market rent for the house,Forums | Speed, Plod & the Law | Top of Page | What's New | My Stuff