Inheritance tax when selling houses between family members?

[TaxItOrLoseIt]

Name change.

I don't want to drop feed, but some areas may be vague to protect others.

My friend, Jane and her DH are going to buy Jane's Mum's house. They will pay the market value. Jane's Mum (who is alive) wants to do this so she can pay her loved ones their inheritance while she is alive to see them enjoy it. Jane's Mum will live with Jane and her husband but there is talk of building her a 'granny flat' on the land. Jane will also inherit from this sale.

I was chatting to someone about houses/prices of property in the local area, and relayed this set-up to them. The person said they will owe inheritance tax once Jane's mum passes. (Jane's mum is in her early 90s, in good health and sound mind). Jane doesn't know much about legal stuff but her husband is adamant they won't have to pay because the sale of the house is all above board - which it is. I mentioned it when I popped round for coffee and they were talking about using some of the money for a holiday and some DIY jobs at Jane's mum's house when it is theirs.

I'm naive about this stuff, but I'm worried for Jane and her kids who will inherit substantial amounts of money and may end up with hefty inheritance tax bills because all inheriting have basically already spent the money in their heads. One child using it for a house deposit, another travelling, that kind of thing.

Is Jane's DH being a bit of a fool? Surely if there is a solicitor involved to oversee the sale of the property, they would inform Jane and her husband about inheritance tax? I don't think they are intentionally trying to avoid paying inheritance tax, I think they think it's a win win situation for everyone involved and they're helping Jane's mum.

The fact the house sale is at market rate is irrelevant, inheritance tax is liable on cash gifts if they are over the threshold. But inheritance tax diminishes over time, so every year she lives the better off they are.

they need to be aware of the liability in case the worst should happen.

of course if she needs care time limits do not apply and the council can come after the family at any point in time if they feel there has been deprivation of assets

Depends if the house forms part of Jane’s mum’s gift,were she to die with 7 years, and the overall value including any other assets is above £325k(or £650k if her father’s allowance can also be claimed). The resulting money from the sale could be liable for IHT (with certain allowances) if so and the estate would have to pay that in first instance, including the value of such gifts.

But if they are buying the house at market value they are giving money to the mum so where is the money that they are spending coming from?

As others have said, the house sale/purchase is a red herring. Regardless of this, Jane’s mum is passing on her estate before she dies so the IHT rules apply.

Not an expert on tax but the sale at market value is fine as Jane is buying the asset not being gifted it. If she then receives a gift from her Mum out of the sale proceeds then this could potentially be taxable but only if Jane’s Mum passes within 7years and has an estate greater than her IHT free allowance. There is not enough info here to say what that allowance would be but could be as much as £650k or Zero if there have been a lot of gifts.

Same puzzlement here

https://www.gov.uk/inheritance-tax/gifts

They will take out a mortgage to buy the house and then spend the cash from mum.

So they buy the house and Jane's mom has the cash in the bank.

How are they using the money to go on holiday? Is Janes mom then giving her children a proportion of the cash each, like an early inheritance?

Janes moms estate is now worth £x cash. You pay IHT if that £x is over the threshold when she dies and the cash becomes her estate. If the estate has been diminished by gifts then IHT could be liable on what the estate would have been 7 years ago. And then revised downwards on a sliding scale each year. So if the mom lives for another 10 years they'd probably be ok. If she dies in the next 12 months, not so much.

So I assume that they are going to rent the house out which is a lot of hassle.

Actually I now see that they are going to live there.
But the cash she gives them will still be liable for inheritance tax unless she lives 7 years.

Mum will be giving everybody their inheritance out of the sale of her home. Jane will have an amount, as will her sister and the grandchildren. Mum will have a sum left for herself to enjoy the rest of her life comfortably.

I agree the house sale is a red herring. My understanding of the situation is: Jane’s mum wants the proceeds of her house sale now so she can give her family their inheritance now, whilst she’s still alive. This is where the 7 year rule will come into play. If she dies within 7yrs of giving those gifts, then IHT will be payable. I think!

Depends on the figures you're talking about. If the DM inherited from her DH then her IHT allowance could be £1m. Jane and her family will only pay IHT on anything over that amount within the 7 years.

Jane and husband have a house which they will sell.

I believe mum was left everything after her DH passed away. House/pensions/savings. Not a huge amount. The house has land which wraps around the property but is a modest size with three bedrooms.

The primary consideration is that Jane mum has to live 7 years after gifting her money if she wants that gift to be outside her estate for inheritance tax. She should sign and date a letter documenting each gift so everything is clear.

secondary considerations- if Jane’s mum continues to live in the house or granny flat without paying rent, the gift might not count and things get complicated. If Jane’s mum has no assets and asked the council to pay for her care home, the council will ask for inheritance back. Talk to a lawyer for details.

I’m not sure it’s even about the sale being a red herring so much as it might actually be a negative thing to do in terms of potentially increasing IHT payable in the sense that if you are passing on a main property to your children it increases the amount of estate that can be inherited before iht is paid from
£325k to £500k so if you’re ‘only’ passing on cash gifts from the house sale wouldn’t anything over £325k be taxable? Obviously, the house might be worth less than £325k anyway and, hopefully, Jane’s mum will live more than seven years, but I think they should definitely get proper advice before doing this - especially if Jane has siblings or other family members their decision might impact. Obviously, if it’s not being done for iht reasons fine, but something to consider. (Also, apologies if I’m wrong or misunderstanding - im no probate specialist!)

eta: the £325k and £500k are if there’s no prior inheritance from Jane’s dad - it’s potentially double if there was inheritance from him.

Selling the house at market value - fine, in itself. However it reduces the amount of her estate that is exempt from IHT because she loses the additional allowance for passing a primary residence to a child

Giving the money away - deprivation of assets if she needs care at any time in future (unlike IHT there's no 7-year limit); gift still counts as part of the estate and liable for IHT if she dies within 7 years; if she carries on living in the house the gifts of money from the sale might count as a gift with reservation of benefits and remain liable for IHT beyond the 7 years (would need legal advice on this).

On the whole, unlikely to be a good idea.

The fact that Janes mum will still be living in the house may have a bearing on the situation- it would if she was signing it over to them, don’t know if selling it makes a difference.
Also, the allowance is less for cash/other assets than a residence.
A conveyancing solicitor won’t necessarily know about IHT, they need to speak to someone who does and can give proper advice if the sums involved are over approx £4-500k.

Are they selling that house to be able to purchase Jane’s mum’s house? And thinking that if they do this, IHT no longer applies?

Good points from PP that by removing the house from the estate and passing down only cash, the IHT allowance is reduced.

I think only the 7 year rule applies. She is not gifting the house then living there for free so there is no gift with reservation of benefit. Depending upon how much she is then gifting from the sale it might be better to pay some as rent as it isn’t a gift then and winter be caught in the 7 year rule. I would suggest an accountant or an IHT planner not a solicitor.

You can still get the residential nil rate band even if you’ve sold the house (it’s called downsizing exemption), but the rules are complex.

I’d also be worried about pre owned asset tax here too - a notoriously complex tax to understand, and a hugely onerous one too.

Mum will as a minimum need to pay her share of expenses in the combined house, and maybe full market rent (as a lodger) to get around POAT.

And if Mum dies within 7 years the cash gifts can come back into charge if they exceed the available NRB.

But this is all gnarly tax territory.

Thanks for clarifying - a little bit of knowledge can be a dangerous thing… which is why I think they definitely need tax advice (and not from me☺️).

If the mother is writing or changing her will, then perhaps she could ask her solicitor to recommend an inheritance tax specialist who could advise on the the best way she could achieve this outcome.

It’s close to my area of expertise, and I’d still need a couple of hours (and more info) to think about it before giving definitive advice that it’ll be fine!