Inheritance Tax: How to manage property gifting

We’ve had some family discussions over Christmas about the amount of Inheritance Tax we’re going to have to pay when my mother dies. Her total estate is likely to be somewhere in excess of £2 million and quite a considerable amount of that is because of the value of the lovely house she lives in, which is worth about £850,000 in the current market. She suggests that we put the house in my name (I’m her only child) now rather than leaving it to me in her will. Is that the right thing to do?

Richard Barker of Smith & Pinching responds:

Managing a future Inheritance Tax (IHT) liability is an essential part of building a financial plan, particularly as you grow older. Gifts do play an important role in managing IHT, but there are strict rules about how gifts are treated.

The critical point to make in your case is that if your mother puts her home in your name and continues to live there, the gift will usually be considered as having “reservation of benefit” and so will still count as part of her estate when she dies, irrespective of how long she lives after making the gift.

There are two principal ways of managing this, having made the gift of the house to you. The first would be for her to pay you a realistic market rent for the property. Alternatively – and this won’t necessarily be what either she or you want – you could move in and share the property with her, in which scenario she would gift, say, a 50pc share of the property to you and you would each pay your share of outgoings.

The market rent route may be something to consider, given the size of her estate, as it would also allow her to pass money on to you to reduce her overall estate further, although any rent you receive would be classed as income for tax purposes.

It is also important to remember that, apart from any portion covered by an exemption, the gift will still be counted as part of her estate if she were to die within seven years of making it, and the gift will be the first item to use her IHT exemption on death (nil rate band).

If the gift exceeds her nil rate band there will also be IHT payable by you as the recipient of the gift should your mum pass away within seven years (although the amount is reduced after three years). The amount of exemption she will receive on death will depend on a number of factors, including whether she has inherited any exemption from a deceased spouse or civil partner, the size of her estate, and if she leaves the value of her home to her direct descendants.

IHT rules are complex, particularly for large estates, so I strongly recommend that you and your mother take independent financial advice from a Chartered Financial Planner.

Any opinions expressed in this article do not constitute advice. For more information visit www.smith-pinching.co.uk