Inheritance tax warning: What you must be aware of if you put house in child’s name

HM Revenue and Customs (HMRC) is expected to collect £6.9billion in Inheritance Tax in 2023 to 2024 with some of this due to gifts gone wrong. However, careful planning could make all the difference.

Inheritance tax explained by Interactive Investor expert

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When it comes to inheritance tax, one question that people often ask is: “Should I put my house in my children’s name?”

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, 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.

“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.

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However he added: “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.”

Direct lifetime gifts can be made to any individual up to any amount without any immediate tax liability, however the person giving the gift would need to survive seven years from the date of the gift.

If someone’s estate is valued at more than £2 million the resident nil-rate band is tapered.

Mr Latham explained: “For every £2 over £2million, the nil-rate band of £175,000 is reduced by £1 until it disappears completely.

He continued: “This is equal to £2.35million for single life estates or £2.7million for married couples.

“If this were to occur, then only the nil rate band of £325,000 applies.

“The taper threshold applies to the value of the estate after any liabilities but before considering any exemptions or reliefs.

“Therefore, any reliefs such as business relief assets still need to be included in the calculation.”

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However, any gifts made prior to death, regardless of whether made within seven years or not, do count as deductions.

He concluded: “Inheritance tax is not just about preparing your money for those you leave behind.

“It is also about preparing those you leave behind for your money.

“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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