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bigduckontax
bigduckontax, Accountant
Category: Tax
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I have a house in the UK that I would like to leave to my children

Resolved Question:

I have a house in the UK that I would like to leave to my children now to prevent me paying inheritance tax. I would like to carry on living in the house but I'm only 65 so hopefully have a few years left in me. Whats the best way of setting this up?
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.

Hello, I'm Keith and happy to help you with your question.

The obvious solution is to gift the house to your children now, Such a gift of property have the following effect. On the gift of the house a Potentially Exempt Transfer (PET) is created in your estate for Inheritance Tax (IT) purposes. PETs run off at a taper over seven years and in the event of the donor's decease within this period the PET is added back to their estate for IT purposes. In the event of the estate being insufficient to meet the IT on the PET the liability cascades down to the beneficiary for immediate payment.

Unfortunately your remaining in residence creates a gift with reservation and the seven year rule will not start to run until you vacate, presumably into residential care, at some future indeterminate date.

This method of IT avoidance has its limitations as I have described. IT does not kick in until assets on death exceed 325K and this is inflated by inter spousal and certain charitable legacies. Furthermore, both husband and wife both have a 325K IT exempt amount and in the event of one going and not using all their 325K the balance is available on the later death. IT is at 40% flat rate on assets over the 325K, but the rate falls to 36% if 10% of the estate is left for charitable purposes.

I am so sorry to have to rain on your parade.

bigduckontax and other Tax Specialists are ready to help you
Customer: replied 2 years ago.

Thanks Keith, would there be any other strategies to limit IT that you can suggest? Is it not possible to gift and then pay rent to my children? Would this have to be market rent? I also have 2 rental properties and some cash.

What evidence would you need to supply to demonstrate that something has been gifted and any limitations to this?

Expert:  bigduckontax replied 2 years ago.
Yes it is. Here is the Gov UK advice:
'Giving away the home and living in it
If the original owner lives in the home after giving it away, they must pay the new owner a ‘market rent’ (the going rate for similar local rental properties).'
So there is the solution. The beneficiary charges the market rent and the 7 year rule kicks in from the day the tenancy commences. Make sure that the tenancy is formal would be my advice with tenancy agreements, rent books etc.
The land conveyance when the gift is made would be adequate proof of transfer.
Simple, as the Mercat in the TV advert would say!
Sorry for the delay, I was having dinner. I am responding from a time zone 7 hours ahead of GMT.
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