Can I gift half of my house to my child to cut inheritance tax?

Question

My husband passed away five years ago. He left a homemade will that was considered not valid so I went through two years of difficulty and legal expenses regarding inheritance issues. Given the unpleasant experience, I want to plan ahead and put all my assets in order, to avoid paying a lot to HMRC. I am 59, in good health and solely own my property. I would like to gift half of the property to my son – either by making us joint tenants or tenants in common (50/50 split) for inheritance tax (IHT) purposes. Which type of ownership is better? And am I right to understand that after seven years, the property will not be included in my estate when I pass away? If the property is sold, before the end of seven years, how is the capital gains tax calculated?

From:
VT/Kent

Answer

Thank you for your interesting question. It is good to hear that you are planning ahead and getting your affairs in order.

I understand your aim is to avoid paying unnecessary inheritance tax and your thought is that gifting half of your house to your son is the best way to achieve this.

Whether this is the best solution for you is tricky to know without knowing some additional information, including the current value of your house, whether your husband had any unused IHT allowance and whether your son lives with you at the property.

Given that you mention difficulties in dealing with your husband's estate, I will assume that you only have your individual IHT allowance of £325,000 remaining, that your house is valued at more than £325,000 and that your son does not currently live with you.

Regarding your question about joint tenants or tenants in common, as you want to leave your son 50% of the house (rather than the entire house), your only option is to own as tenants in common.

However, you should carefully consider whether you are satisfied to live with the risk of loss of control this entails.

What would happen if your son were to get into financial difficulty or go through a divorce? You could lose half of the value of your home to a third party.

What if you were to meet a new partner and wish to set up a new home? You would only have half of the value of your current home available to use.

With regard to future IHT and the seven-year rule, again it depends on your circumstances. If you continue to live in the house rent-free after gifting some or part of it to your son, your estate still has to pay IHT on the home even if you live for seven years after giving it away.

This is known as a ‘gift with reservation of benefit'.To avoid this you would need to pay your son fair market rent for living in the house. Your son may then be liable for income tax on this rent. However, if your son lives with you and shares the bills, the proportion given away won't be included in the valuation of the estate.

Finally, you are correct in thinking the gift will be subject to a capital gains tax liability.The difference between the purchase price of the property and the market value at the date of the gift would be taxable.The tax rate will vary between 18% and 28% depending on the amount of gain and your son's other income.

Your question raises many points that require careful consideration and further discussion with an expert.To make matters even more difficult you should also consider some of the other options available to you to help achieve your aim, including:

An equity release scheme, which involves releasing money against the value of your home. This would enable you to fully retain ownership of the house, make an immediate cash gift to your son that would be exempt from IHT should you survive seven years or more and will reduce the overall value of your estate. You can then gift the remaining value of the house in your will.

The purchase of an insurance policy that would cover any IHT due on your estate.

As you can see from all of the above, the decision to gift all or part of your home should not be taken lightly. Ensure you take advice from an experienced estate planner or independent financial adviser.

Joanne Baker of Hillhampton Wills and Probate Services

This article was written in response to a reader’s question. If you have a financial or work/career question that has left you scratching your head ask our panel of experts who will aim to shine some light on the matter.

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Published: 25 June 2015
Last updated: 25 June 2015

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