Hi, just a quick question - couldn't find the answer on the HMRC website.
If a mother and daughter live together in a house owned by the mother, and it's the daughter's only residence as well as the mother's, is inheritance tax payable on the value of the house if the mother bequeathes it to her daughter and then dies?
I think I'm right in saying that if the daughter sells the house later, then since it's her only residence (assuming it still it is at that time), then she won't be liable for capital gains tax.
But what is the IHT position when she inherits it?
IHT would be due on the mother's entire estate in the usual way, and this includes the value of the house. That the daughter also lives there makes no difference.
One way to mitigate the IHT bill might be for mother to gift half the house to her daughter, and then to survive for 7 years. Gifting the other half as well would be possible too, but would not be effective for IHT avoidance unless mother then paid rent to daughter for living in the half house which no longer belongs to her.
If the answer exists, it will be buried in their Capital manual.
Not a definitive answer, but I have never heard of any such an exemption, so I assume the estate will be taxed based on the valuation at the time of death.
Assuming death isn't too imminent, their may be options involving transfer to joint (not tenants in common) ownership, or outright ownership by the daughter, but there are questions about interests in possession and potentially exempt transfer for which you would need proper professional advice. She might, for example, have to pay the daughter a market rent.
I think that Ronald is suggesting that tenants in common is also a viable option. My thought was that the half she still owned would still be taxable, but there would be less tax and it might bring things below the tax threshold. PETs are still an issue. I'll bow to Ronald, for the moment, on interest in possession.
I've noticed this option of gifting the house to the daughter and then paying her a market rent. Would the mother have to live for seven years for this to work in terms of avoiding gift tax and IHT?
AIUI the distinction between JT and TiC is irrelevant for tax purposes.
When an asset is owned in shares (TiC) by several people, and one of them dies, then what happens to the shares owned by the deceased depends on what their will says, or in the absence of one, what the intestacy rules say.
When an asset is jointly owned (JT) by N people and one of them dies, then its status automatically changes to being jointly owned by the remaining N-1 people, irrespective of any will or intestacy rules.
In other words a JT bypasses a will, and property passes by survivorship rather than by inheritance. But as you might guess, you can bypass inheritance, but you can't bypass inheritance tax. So for IHT purposes a joint tenancy by N people is treated exactly the same as if it had been an in common tenancy in N equal shares.
Quite.
Yes. Whatever fraction of the house is gifted, be it half of it, all of it, or any other share, will remain potentially taxable unless the donor survives for 7 years.
The problem with giving all of it is that, unless rent is paid, the gift would be "with reservation" and would be ineligible for treatment as a PET. Not sure whether in such a case a gift of the whole would be treated as two gifts of half, with one half being a PET and the other a GWR.
What often happens when people try to avoid IHT by gifting their house to the kids while continuing to live there, is that they live there on their own. To avoid GWR treatment the donor would need to pay rent at what the market shows as usual for that type of property.
But in the case being discussed, where the property will be lived in by two people, it could be argued that the "market rent" the donor would need to pay might well be quite a bit less than half the usual rent for that type of property, because the mother is now merely a lodger in her daughter's house.
On the contrary, they would ensure that it is effective.
As I see it, prior to the POA regime a gifted asset which the donor continues to enjoy without paying full market rent for it would automatically be a GWR and would therefore be ineffective for IHT avoidance.
The POA tax makes it possible to retain PET status by paying income tax on the *shortfall* of whatever rent is paid, if any, with respect to that market rent.
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