Hi, just a quick question - couldn't find the answer on the HMRC
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?
Yes. See below.
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.
On Jun 12, 11:41 am, David Woolley
Thanks Ronald and David.
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
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.
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
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
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.