Anyone help me out with an inheritance tax question?

[ArchiesMamaBird]

Ok so this is a long one, but hoping there's someone here who can help?

DH's aunt owned a house all her life, mortgage was paid off years ago. She wrote a will (between 5-10 years ago, not sure of date) to say that she wanted her house to go to her DB (so my FIL). 2 years ago she spoke to FIL and told him that she would really actually love the house to be left to DH, me and our DS. (FIL was more than happy for this to happen, he was actually planning on giving us the house anyway if anything were to happen to her). Anyway, she never got round to changing her will to state this because she got ill, and long story short, she passed away 12 months ago. So FIL inherited the house, but gave us the keys. We've spent the last 10 months completely renovating it, we've spent £60k doing this.

We sold our house, moved in here 4 weeks ago and FIL said that he'd now start the process of signing it over. Fast forward to today, and his solicitor has informed him that if he signs it over now, we'll have to pay 40% inheritance tax. So he's been advised to keep it in his name for the next 7 years, but to change his will to state that if anything happens in those 7 years, then the house comes to us. Does this sound right? I basically want to know if there's any way round this? Because as it stands, I now have nothing to my name (apart from a little bit of money that we made from sale of our old house). And I'm just thinking, if me and DH were to divorce (FYI we are happily married and I really don't think we will), I would literally be left with nothing. So would I be crazy to pay money towards bills and living costs here, when in reality I could be left with sod all?

How much is it worth? Im not sure he has understood correctly. Did he pay iht already? He can gift it to you but if he were to die within 7 years and it exceeded the threshold you'd pay iht on it. There are annual tax free allowances for gifts.

Can you change the will? link

Just coming on to suggest a deed of variation.

Doesn't sound right though unless he's transferring the house into trust maybe rather than to you outright.

I would have thought it would be a potentially exempt transfer and IHT would only be payable if he died within seven years and his estate including the gifted house was above the threshold. Not an IHT specialist though.

I'm also slightly concerned you've spent 60k doing up a house you don't own...

Have you seen the written solicitor's advice stating this? I'm not convinced he hasn't got his wires crossed.

Thank you for all of your replies. I haven't seen any documentation, so there's a very good chance that he has got a bit confused. The 60k that we spent doing up the house was actually given to DH by FIL (it's what he would have inherited from PIL, they just decided to give it us now as they know we needed it.) And I've always been a bit dubious of spending all this cash when the house didn't actually belong to us, but it's DH's parents/inheritance so I've kind of taken a backseat really.

I'll look into all of your suggestions. I'm more than happy to pay for a solicitor to go through all of this with me (I have a feeling FIL will drag his heels a bit, waaaay too laid back) but I just wanted to get my head around it a bit first before wasting an hour not knowing what to ask.

The 60k that we spent doing up the house was actually given to DH by FIL

Ask the solicitor about this while you are at it. It might be an idea to get something drawn up to document whether this was a loan or a gift.

Thank you senua, I'll make sure we do.

That doesn't sound right to me. If your FiL has inherited the house, then all inheritance taxes have been paid. It is now his house and he can do what he likes with it, give it to you, whatever.

However, if he gives it to you and dies before 7 year have passed, then the house will be considered to be an inheritance from FIL rather than a gift from him. So inheritance tax might need to be paid then, depending on the value of the rest of his estate.

So actually, he needs to give you the house asap, in case he dies within the next 7 years. Do you think he is misinformed/crossed wires. Or could he have had a change of heart?

Thanks Tinkly. TBH I think he just has his wires crossed. PIL's are SO bloody generous (annoyingly so) and they would honestly give anything to DH, so I'm 99.9% sure he's just a bit confused. I've just found out that he hasn't actually met with the solicitor today, so it's probably a case of him talking to a friend and getting a bit of wrong info and then he's panicked and called DH to warn him. He has an appt with Solicitor next week so I'm sure he'll get the best advice and go from there.

Ah right. Yes, deffo sounds like crossed wires - there's quite a lot of misconception round gifts. If your fil dies within seven years of gifting, the house will be treated as part of his estate. So far as I can see that's the only potential liability to IHT you may have - and that I think would be paid from his estate usually.

Two different lots of IHT here. The tax on the aunts estate - has this been paid? If it hasn't it needs to be. Secondly the IHT on FIL's estate should he die. If he dies in 7 years time the gift of the house won't form part of his estate so you don't need to worry about it. If he does die within 7 years then your house is part of his estate and assuming that estate is above the tax free amount, the IHT bill will be calculated including the value of your house, but at a progressively smaller rate each year.

A deed of variation on your aunts will or some sort of trust would sort this out.

Just popping in. I think I've heard something recently about the 7year timeframe being scrapped and any funds/gifts given could be construed as a deprivation of assets. Not sure how it's decided though

If you are being given a house, and t it Capital Games Tax you will pay, not Inheritance Tax. You need a specialist tax solicitor to help you with this.