Personal Finance

Inheritance tax 'issue' you need to be aware of when leaving house to child


In the 2020/21 tax year, HMRC received £5.4billion in Inheritance Tax (IHT) receipts, despite the tax only affecting around four percent of deaths in the UK. In the year 2023/24, the amount of inheritance tax collected is expected to be £6.9billion.

There can often be a lot of confusion around inheritance tax, especially in terms of how to limit liability.

Planning carefully could help Britons ensure that the maximum amount of wealth that they have worked hard to accumulate throughout their life, can be passed on to the right people.

With this in mind, Tim Latham, a chartered financial planner at Equilibrium Financial Planning answered some of the most commonly asked questions about inheritance tax.

This includes whether a person should put their house in their child’s name.

“The issue with putting your house in your children’s name is the rules around gifts with reservation,” he said.

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“On April 6, 2017, a residence nil-rate band was introduced, which, under current legislation, allows a further £175,000, providing residential property is left to direct descendants.

“This gives a combined nil rate allowance of up to £500,000 for individuals and £1million for married couples.

“The nil-rate band of £325,000 per individual has been frozen until 2025/26 and the additional £175,000 residence nil-rate band has been frozen for the next five years.”

Mr Latham explained that as house prices and share prices continue to rise, more middle-income families are likely to find themselves with an IHT bill in the future.

However, Mr Latham explained that a person’s children could still take on some financial burden by doing this.

He continued: “Your children may have to pay income tax on the rent you pay to them, and there could also be capital gains tax payable between the date of the gift and date of death.

“Depending on the financial circumstances of your children, there is also a risk that you could lose your home in the event of divorce or bankruptcy.”

Will children pay tax on money that is a gift to them?

“Direct lifetime gifts can be made to any individual up to any amount without any immediate tax liability to you or the beneficiary.

“The key point is that to avoid inheritance tax you would need to survive seven years from the date of the gift.”





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