The Student Room Group

Regarding Inheritance tax

Inheritance tax states that if your estate is over £325,000 when you die then it is liable for tax of 40% after this threshold. However, if any part of your estate is given away 7 years or more before your death, then it will not be liable for any inheritance tax.

So my question is, to avoid the inheritance tax, why don't all parents gift away their estate to their children at a reasonable age like 50/60. They don't necessarily have to give everything and live in a box on the street. All they would do is gift it away so that the house is in their children's name and then they continue to live in it.

I am probably missing something here, so that is why I ask.
If they give away the house they must pay the going rate of rent to their children who must pay income tax on it. Otherwise they are not considered to have avoided IHT.
Also upon gifting the house to their children the recipients will be required to pay stamp duty on The transfer of ownership. Several thousand pounds.
Furthermore once the children own the property all sorts of things can happen. They can sell it and evict their parents. One might get divorced the settlement of which would force the sale of the house.

You are also completely forgetting that effectively couples have a IHT allowance of £650,000. On first death the first partner leaves their share in entirety to their partner who also takes their IHT allowance. On death of the second partner the estate has £650K IHT allowance.
(edited 9 years ago)
Reply 2
Avatar for 2710
2710
OP
18
Original post by balotelli12
If they give away the house they must pay the going rate of rent to their children who must pay income tax on it. Otherwise they are not considered to have avoided IHT.
Also upon gifting the house to their children the recipients will be required to pay stamp duty on The transfer of ownership. Several thousand pounds.
Furthermore once the children own the property all sorts of things can happen. They can sell it and evict their parents. One might get divorced the settlement of which would force the sale of the house.


What regulation/law is this? Can you link me? If I have a house, and I do not want to charge rent for people living in it, I cannot do that? Why is that? I know of many people who have grandparents living with them, does that mean all those grandparents are paying rent?

Several thousand pounds worth of stamp duty is peanuts compared to what could potentially be charged through IHT.

Well true, but I guess that is a matter of trust. If it was a mutually discussed plan with their children, hopefully the majority of people will not treat their parents in such a way...

In terms of the divorce, that is true. If they were to pass all their assets to their children, they wouldn't really have anything after divorce. But stil, if it was a very wealthy family with a large estate, wouldn't it be more beneficial to them to risk it? 40% of the (estate - £325,000) will be hefty.
(edited 9 years ago)
Google it.
It isn't hard to find.
Start here
http://www.metcalfes.co.uk/popular_misconceptions.html
It is basic tax law.

You seem to misunderstand my divorce point.

If there are 3 married children and the house is given to them equally immediately the spouses have a right to a 6th of the house each. If one of the kids divorces his partner is entitled to their sixth. If they can't be paid off from assets the house will gave to be sold.

Very wealthy families do avoid IHT but it usually involves very expensive and complicated trusts.
(edited 9 years ago)
Original post by 2710
Inheritance tax states that if your estate is over £325,000 when you die then it is liable for tax of 40% after this threshold. However, if any part of your estate is given away 7 years or more before your death, then it will not be liable for any inheritance tax.

So my question is, to avoid the inheritance tax, why don't all parents gift away their estate to their children at a reasonable age like 50/60. They don't necessarily have to give everything and live in a box on the street. All they would do is gift it away so that the house is in their children's name and then they continue to live in it.

I am probably missing something here, so that is why I ask.


The rules governing inheritance tax can be found in the Inheritance Tax Act 1984 (it's a tough read). The rules that prevent your transaction from working are called the gift with reservation rules. Basically if you transferred it to your kid and they weren't charging you rent at full market rate (backed by professional valuations, proof etc) then the house would still be deemed to be part of your estate so the transfer would fail.

There are also rules in place to prevent you selling your house, gifting the cash to your kid and then having your child rebuy the house and let you live in it. There are various other creative methods that have gone through the courts and failed.

I would expect that some politician is going to grasp the nettle and pledge to raise the IHT nil rate band to £1 million. In my opinion this is a potential election breaker as so many people are now getting caught out. It is of special importance to single people or divorcees who do not have the benefit of transferring property under the spousal exemption and obtaining a double band on the death of your spouse.
average life expectancy is now 80.75 and the courts are full of cases where people disagree with their relatives. Only a foolish parent would rely on the charity of their child(ren) when they'll probably need the equity to pay for their nursing home.

Most parents - especially those of people using TSR - have already spent vast sums of money on supporting their children through school and university. Eventually young people have to stop relying on others and fund themselves.

Quick Reply

Related discussions

Latest

Trending

Trending

Articles for you