Inheritance tax: How to help children buy a house without handing it all to HMRC

Inheritance tax explained by Interactive Investor expert

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When it comes to stepping onto the property ladder more than a third of people (33 percent) rely on the Bank of Mum and Dad – or even the Bank of Grandma and Granddad. So how can grandparents and parents avoid handing all their money over to HMRC?

The average handout to younger family members to help them get onto the property ladder is £19,000, according to a Legal and General survey.

That would mean Britons are subject to a hefty inheritance tax (IHT) bill of 40 percent on the amount above £3,000, if they had already exceeded the inheritance tax threshold which is normally £325,000.

However, there are some ways to get around this which are perfectly legal, resulting in people being able to give much more.

Britons who don’t use their allowance in one twelve month period can carry it forward one tax year.

This potentially increases their allowance to £6,000 or even £12,000 for a couple.

No tax is due on gifts if the person lives for seven years after giving them – unless the gift is part of a trust.

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Another way generous grandparents and parents could avoid giving all their money to the taxman is by taking advantage of the marriage gifts allowance.

Emi Page, Associate at law firm Winckworth Sherwood, explained: “A parent could gift their child up to £8,000 – a £5,000 gift made in consideration of marriage plus using their £3,000 annual exemption.

“Or possibly up to £11,000 if they can carry forward a full unused annual exemption from the previous tax year.”

However, experts advise the older generation to not forget their own needs and to make sure there’s enough left over for them to enjoy their retirement.

Another way some may look to pay less inheritance tax is to put the family house into a child’s name, however there are some complications with this method.

Tim Latham, chartered financial planner at Equilibrium Financial Planning told “The issue with putting your house in your children’s name is the rules around gifts with reservation.

“These rules mean that if you continued to benefit from the property after the gift, for example, by still living in a house, the gift would not qualify and inheritance tax would still be payable on the value of the asset.

“In order for the house to qualify as a gift for inheritance tax purposes, you would need to pay your children a market rent once you’ve gifted your home to them.”

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For anyone considering going down this route, Mr Latham advises Britons to be wary and seek professional advice.

He added: “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.

“It is important to think about what it is that you want your money to achieve, who and how you want to help.”

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