Can we give away our home to beat the taxman?
My husband and I are worried about inheritance tax (IHT) on our estate and are thinking of giving our home to our children now. If we are not selling the house but giving it as a gift, will we have to pay any tax? SUE TAYLOR, VIA EMAIL
It’s no wonder that this is one of the most common questions asked of Telegraph Money.
After all, who wants their hard-won money to go to the taxman when they die? The Revenue is raking in more from inheritance tax than ever before, raising around £5.2bn in the past tax year alone, and last week’s Budget projected that those figures would continue to rise. The sky-high value of property, especially in the South East, is pushing more of us into a tax bracket designed for the very rich.
The Surrey town of Guildford, for example, pays more in inheritance tax than the whole of Wales and Northern Ireland combined.
Giving assets away is one approach to beating the taxman. However, the first thing you need to ask yourself is: are you actually liable to pay?
Tax relief now allows each of us to pass on a certain amount free of charge. Everyone has a personal allowance of £325,000, in addition to an added tax-free amount of £125,000 called the “family home allowance”.
This extra allowance applies if you are passing your main residence on to direct descendants and increases by £25,000 each year until it reaches £175,000 in 2020. As a result we will soon be able to pass on £500,000 tax free. Spouses and civil partners can double up their allowances, meaning that they will be able to pass on £1m by 2020.
Anything above your allowances will be taxed at a rate of 40pc. If the value of your estate is more than the tax-free buffer, you can reduce its overall size by making gifts to friends and family. You can give away assets tax free – including your house – if you survive the gift for seven years.
You will pay no IHT if you give away your house, move out and live for a further seven years. If you die within three years of the gift, full-rate tax will apply. If you die after the third year a taper relief system takes effect, meaning that you will be charged IHT at 32pc. In the fourth year this drops to 24pc, in the fifth to 16pc, in the sixth to 8pc, and after seven years to zero.
Beware: if you want to continue to live in the home, you must pay a market rate of rent to the new owner and pay your share of the bills, as well as survive for seven years, to benefit from the tax break.
If you do not follow these
If you give away your home while you live in it, you must pay rent to the new owners at a market rate