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Sam, Accountant
Category: Tax
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Experience:  26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
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This question is for SAMTAX, How can children (grown up

Customer Question

This question is for SAMTAX,

How can children (grown up children) reduce their exposure to inheritance tax on property owned by their mum (she became the owner on dad's death and all the children disqualified in her favour), at her death? If you could include info. on 7 year rule as well. Thanks.
Submitted: 3 years ago.
Category: Tax
Expert:  bigduckontax replied 3 years ago.
Hello, I'm Keith and happy to help you with your question.

Before I answer could you please verify an item in your question? You say 'all the children disqualified in her favour'; Do you infer that the property was left to the children and they decided to pass it to their Mum Perhaps you mean that it was willed direct to Mum?
Customer: replied 3 years ago.

Hi Keith, I'd like SAM TAX to answer the question please. Hope you don't mind. Thanks

Expert:  bigduckontax replied 3 years ago.

Sam did not pick up this question within the time limit which is why it devolved upon me to answer. However, I have complied with your request.


I have been told by a colleague that Sam will not be about much for a bit, so if you would like a quicker response feel free to come back to me.

Customer: replied 3 years ago.
Relist: Other.
I clearly asked for SAMTAX to answer so don't understand why Keith has taken my question???!!!
Expert:  Sam replied 3 years ago.

Sam Tax here - not sure why its thought I will not be around - as that is not the case, and most experts do leave questions asking for me alone, out of courtesy!
But thanks for asking for me and lets look at your question.

First I will advise that any inheritances left to spouses are NOT included for Inheritance tax purposes

To reduce exposure on Inheritance tax, the first position to consider is what a persons estate is worth. If its worth less than £325,000 in total (so all assets, property and money) that will be left to anyone other than a spouse, then there is no Inheritance tax that will arise.

If the estate is worth more than £325,000 - then the most common position is to gift money or assets - and as long as more than 7 years lapse from the date of the gift and the date of death, then these drop off, from inclusion in the estates value.
If the time between the gift and death is less than 7 years, then whilst the total value of the gifts have to be considered, there is taper relief applied to the Inheritance tax due, and this applies as per below.

Applying ‘Taper Relief’ to gifts

Inheritance Tax is charged on gifts at 40%. But if the person died between 3 and 7 years of making a gift, you can apply what's known as 'Taper Relief' to the amount of Inheritance Tax due to reduce the amount payable.

Taper Relief reductions

Time between the date the gift was made and the date of death

Taper relief percentage applied to the tax due

3 to 4 years 20%
4 to 5 years 40%
5 to 6 years 60%
6 to 7 years 80%

However if assets are gifted, the act of gifting can give rise to a consideration for Capital gain tax, so this is something to be mindful of.

Finally placing assets into trust - again there could be a capital gain position to consider, on placing the asset into trust, and if the trust generates income, then trust tax returns each year, and if the trust has to be distributed within 7 years (due to death) then again there could be Inheritance tax consequences but taper relief is one again also considered.

Whether or not the recent acquisitions the mother has received from her late mother - can have the will changed (with a variation so those assets/money are left directly to the children) so could be worth seeking legal advise on this and further trust advise.

This is just a basic overview of the position, but if you have any follow up questions, please do fee free to ask



Customer: replied 3 years ago.

Thanks for your reply. The asset is the family house worth 450k. It was built with hard earned money and I don't want 40k (450k-350k-x40%) to go to the government. If she gifts part/all of it to her children and lives for 7 years more, would the inheritance tax still arise or not?

Expert:  Sam replied 3 years ago.

Thanks for your response

First lets look at whether she lives there and its her main or only residence

If she gifts part OR all, its essential then that she pays her children market value rent - (or it will be treated as a gift with reservation, which means its is still added into the estate) and due to the fact that she will benefit from an asset she has part/all gifted, will also give rise to pre owned asset tax.
Then after 7 years as long as rents continue to be paid to the children then the percentage/share of that gifted will drop off the estate for Inheritance tax purposes.
Also note that the children then need to declare the rental income to HMRC

If this is not her main or only residence, then any gift she makes will give rise to capital gains - which will be £450 less £350 = £100K at 18% or 28% capital gains (or a mix of the two - which is determined by her unused basic rate band, from annual income)