Inheritance Tax - Gifts and Passing on your home.

23 March 2016

Passing the family home down through the generations can be an effective inheritance tax (IHT) planning exercise. The original owner (the donor) can escape inheritance tax on gifts as long as they live for seven years after making the gift.

If the donor does not survive the gift by 7 years then any gifts made within the seven years before death become chargeable to IHT and count towards the £325,000 inheritance tax threshold known as ‘the Nil Rate Band’.

However such gifts that become chargeable to IHT not covered by the Nil rate Band benefit from “taper relief” which gives an effective rate of IHT on gifts made between 3 and 7 years before the donor dies as follows:


The seven year rule applies to anyone who passes their home to their children before they die, however if they continue to have the benefit of living in the house rent free then their estate has to pay IHT on the home even if the donor survives for seven years or more after giving it away, this is due to an anti-avoidance provision called “gift with reservation of benefit” (GWR).

If the original donor leaves the property or rents the property at market rate then the seven year rule applies and the gift  is a potentially exempt transfer (PET).

The donor could give away half of their home to their children (or anyone else) and as long as they survive seven years or more and the bills are split between them in the same proportion then the half given away won’t be included in their estate.

A new ‘Residence Nil Rate Band’ is being introduced from 2017-18 onwards, but this is not as generous as it could be and comes with so many conditions many have seen it as worthless.

It is still possible to give away the value of your home to the next generation whilst continuing to live in it in limited circumstances.

An IHT review has the potential to save huge amounts of tax on death, ultimately you have been taxed on the income that has generated your wealth throughout your lifetime, often at higher rates of up to 50%, so why should you suffer tax again at 40% on death?

If you require more information regarding inheritance tax (IHT) please contact us or call us on 0203 039 3993.

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