Ask the Expert: Can my parents give me their house to avoid inheritance tax?

Carl Lamb, managing director of Almary Green

Carl Lamb, managing director of Almary Green - Credit: Archant

Can my parents give me their house now, to keep their inheritance tax bill down when they die? Carl Lamb of Almary Green responds.

Q. My parents own a lovely house in South Norfolk and are fortunate enough to be quite wealthy so are thinking seriously about how they can reduce the future inheritance tax bill that will be due when they die.

They are currently in their 60s so hopefully that will be a long way off yet. They have suggested that they put the house into my name – I'm their only child – so that it's not part of their estate when they die, although they would continue to live in it. Can they do that?

Response from Carl Lamb of Almary Green:

This is a pretty complicated area and is full of potential pitfalls, so please take this answer as general guidance and get some specific advice.

Firstly, if your parents give you the house and continue to live in it rent-free, then it is likely to be considered as a 'gift with reservation of benefit' and will still be counted as part of their estate when they die.

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HM Revenue & Customs will not be happy with the gift if its primary purpose is to avoid tax.

However, if your parents pay you a market rent while they live there, then the gift is without reservation of benefit and follows general IHT gifting rules. If they put the house in your name and you live there with them until they die, again normal gifting rules apply.

It's also worth noting that there may be capital gains tax implications if you decide later to sell the house and it has increased in value since the gift was made.

Normal gifting rules state that when you make a gift, it is considered as remaining in your estate, at least in part, until seven years have passed after making the gift. The value of the gift that is counted in your estate reduces over the course of the seven year period. However, gifts are only counted for IHT purposes if your estate – including the gifts – is worth more than the IHT exempt threshold (the nil rate band) that applies to you.

The nil rate band applicable to an individual is made up of a maximum of three elements. Firstly each individual has a personal nil rate band of £325,000. This exemption can be passed to a spouse or civil partner – if not used in other legacies – giving the second partner to die a potential total of £650,000. On top of that a further nil rate band amount can be added in respect of the family home if it is passed down to children or grandchildren. This residence nil rate band can also be passed on, if unused, to a spouse or civil partner and will relate to the value of the house, up to a maximum.

Frankly, I think your parents should talk to a financial adviser about mitigating their potential future IHT liabilities as there may be better ways of managing their estate planning. There are so many factors to consider and it would be all too easy for them to find that they have gone through the process of making the gift without it having the desired effect.