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.

@BillieWiper You might like the house and it meets your needs? Of course people give money away to escape IHT. You can still keep over £1/2 million and not pay IHT. The sting for a 90 year old is the 7 year rule taper. They have left it late to give. Plus if they have retained interest, there is a tax issue but that can be swerved if they opt for IHT rules. They need tax advice on best method. If there never was IHT due, as sums of money are too small, they do need to think about the POAT rules.

They’re buying the house at market price, then mum is gifting them their share of “inheritance” from the proceeds, hence the IHT implications.

Take the house out of the equation. Yes it is all above board but it doesn’t really matter who Jane’s mum sells her house to. The issue is that she will be gifting some of the proceeds from the sale to her children. If her estate is above the IHT threshold and if she passes away within 7 years of the gift, then IHT will be due.

"If the family home has already been sold, the RNRB is lost."

Not necessarily. There is the "downsizing addition" that covers the case where a deceased person had a home that would qualify for RNRB but then sold it and eg moved into care or downsized into a cheaper home.

This applies where at least some of the estate is passed down to the children or grandchildren.

Indeed. Apologies for missing that.

Yes depending on the size of the estate they will have to pay inheritance tax if the mum dies within 7 years.