Frequently Asked Questions
If I transfer my property to my children and live 7 years I can avoid inheritance tax (IHT)?
You are certainly allowed to transfer ownership of your house to your children and provided it is your main residence there won’t be any Capital Gains Tax to pay. However, if you continue to live there it will be treated as a “Gift with reservation” and therefore would go straight back into your estate for inheritance tax (IHT) purposes irrespective of how long you live UNLESS you pay a market value rent. This of course will mean that your children will have to pay income tax on the rent received, and if the house was subsequently sold, capital gains tax on the proceeds.
Can I sell the house and then move into a “granny flat” with the children?
Sorry, unless you pay them market rent, it could be treated as a pre-owned asset with income tax implications.
Can I give my annual allowance of £3,000 to each of my children?
No. The £3,000 limit is per donor not per person donated to, but you can go back one year if you didn’t use last year’s allowance.
If I make a gift and live for more than 3 years, will there be less tax to pay?
Not necessarily. This is a common misunderstanding. Many people get confused with what is called “taper relief”, which is on a sliding scale according to when you die. If you live for more than 3 years but less than 7, then you will only get tax relief if the amount of the gift is greater than the nil rate band, in the year the person dies. At the moment that would mean if a gift that goes back into the estate, takes the estate above the £325,000 nil rate band, then any amount over this amount, will be taxed. For most people taper relief is never relevant.
Does my spouse get everything if I die?
Not necessarily unless you make a Will. Under the laws of intestacy, a spouse is entitled to your “chattels” (personal property items), a statutory legacy of up to £250,000 (or £450,000 if there are no children*), and a “life interest” in half of any residual estate.
*Where there are grandchildren, surviving parents, brothers or sisters (or their children), different rules apply.
Can my children act as executors?
Yes they can so long as they are over 18. They can also act as trustees should you wish. Where trustees have discretion, you may wish to appoint “third party” trustees. Executors can also be beneficiaries under the Will, so in many cases it is convenient for family members to be appointed and sensible to give them the power to employ professional help if they need to.
How can I transfer a nil rate band?
This is done by the executor or administrator on the second death. They will need to first work out the amount of unused nil rate band is. If everything was left to the spouse or civil partner then it will be 100%, but there may have been specific legacies to other people (such as children or other relations) made and these will have to be calculated as a percentage of the nil rate band applicable at the time of the first death and then deducted to find the unused amount that can be carried over to the spouse.
You will then need to get a copy of the original Will, any deed of variation and the grant of probate.
You then need to submit them along with the relevant forms (IHT402 and IHT400) within two years of the second death, although remember that any tax must be paid within 6 months!
Tax Planning is not regulated by the Financial Services Authority.
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