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Can I give away my home to avoid inheritance tax?
In most cases the home makes up a large part of an estate for inheritance tax purposes, but you have to be careful if you try to give away your property to reduce the bill.
by Michelle McGagh on May 16, 2012 at 15:15
As house prices have shot up over the past decade, they have pushed many people’s estates over the inheritance tax threshold. So could giving away your house be a way to reduce your tax bill?
Inheritance tax isn’t the only reason people want to give away property. Many people want to reduce their estate to avoid paying for nursing homes and care costs and others see their children struggling to get on the property ladder, or buy a bigger home for their own family, and want to help them out.
However, gifting away your home or signing over the deeds to a loved one is not straightforward and you should weigh up the pros and cons before doing so.
Can IHT be avoided if I give my property away?
Homeowners are entitled to give their home away whenever they want. If your home falls under the £325,000 IHT threshold, known as the nil rate band, then there is no IHT liability. However, if your home is worth more than this amount then the person you give it to could still be liable to pay the 40% IHT charge and other tax charges.
Giving your property away is regarded as making a gift. Although there are some allowances for making gifts every year, the taxman is very particular about large gifts and has put in place a ‘seven-year rule’.
This rules means that if you make a gift outside the normal perimeters, like gifting a property, then you have to survive for seven years after doing so before it falls outside of your taxable estate. As our recent guide on 'how to avoid IHT' explains gifts where the seven-year rule applies are known as ‘potentially exempt transfers’.
If you die within seven years of gifting then the property falls back into your estate for IHT purposes and the person who received the gift will be liable to a tax charge as well. The tax charge reduces depending on how long they have had the gift.
What about giving them the profit from a sale?
If you sell your home and give the money to your children you still have to live for seven years before the money falls outside of your estate. Everyone is allowed a certain allowance for gifts each year but a house sale is certain to exceed those limits.
Are there other tax charges?
Gifting a property could open you up to other tax charges, such as capital gains tax (CGT). If you are giving away your main home, known as your ‘principle primary residence’, then there is no CGT charge.
However, if you are giving away a second property or holiday home then you may be liable to pay CGT on any increase in value that has occurred between buying the property and giving it away.
Can I continue to live in the house if I give it away?
You can continue to live in your property if you give it away but it will completely change the tax implications for you and the person you gift it to.
If you remain in the property and do not pay rent then the gift becomes a ‘gift with reservation of benefit’ – meaning you reserve the right to benefit from the property.
More about this:
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