Can my sons inherit my house without paying inheritance tax?

7 October 2014

Q

I'm 71 and not in good health. When I die, my two sons will inherit my house. They both have mortgages on their own homes, so will they have to pay inheritance tax when they sell mine? My home is worth about £180,000. Would it benefit them if I signed the house over to them now but still lived in it?
From
ML/Manchester

A

Whether inheritance tax will be due when you die will depend upon the total value of your estate.You are entitled to an inheritance tax nil-rate band of £325,000, which means that tax won't be liable unless your estate is worth more than this amount when you die. Your nil-rate band could be even higher if you had a deceased spouse who didn't use all of their allowance.

So if your estate is worth less than £325,000, you probably don't need to worry about inheritance tax.

You might be considering gifting your property to your sons while you're still alive in order to reduce your inheritance tax bill if your estate is worth more than £325,000.

However, there are a number of pitfalls to this.To start with, the gift would be treated as a potentially exempt transfer and so you will have to live for at least seven years before the value of the property is fully outside of your estate.

You would also have to show that you no longer have a financial interest in the property and so would have to pay rent to your sons at the going market rate.

There could be further problems if you subsequently fall out with either of your sons, if they go bankrupt or if someone else stakes a claim in the property, perhaps because of the death or marriage breakdown of one of your sons.

If you are facing a potential inheritance tax liability, there might be other steps you can take to reduce this.

If your sons inherit the property and subsequently sell it, then any gains they make on the sale could potentially be liable to capital gains tax.

Your sons will need to think about all these points, including whether to sell the property eventually. There isn't much you can do to influence what happens.

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