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Property Tax

Thinking of gifting your house to your children?

Inheritance tax: Does gifting my house reduce it?

If there is one thing that seems to be a common concern and annoyance to this setting up their will, it is the idea of their loved ones paying inheritance tax. Inheritance is a tax that has been created to be charged to those who are inheriting money or a property from someone in their will.

The charge for inheritance tax is 40% and it applies to an estate that is worth more than £325,000 or £650,000 for married couples or couples that are in a civil partnership. The 40% will be taken from whatever is left over this limit, and for those who have quite a large estate to leave behind, this can account for a rather large amount that their will beneficiaries have to pay out.

Can I gift my house?

One way that you can try to avoid inheritance tax is by gifting your home to your children. This is called a potentially exempt transfer (PET) and it can be applied so long as you are still living up to at least another 7 years after making the gift.

There are other limitations that you will need to keep in mind if you do want to consider this option.

How to ensure that you can make a PET

If you want to utilise PET in order to make sure that your children do not have to pay inheritance tax on your property then you need to ensure that the gift has been made with absolutely no strings attached. That is, anything that could be of a benefit to you.

One example of this is that you gift the house to the beneficiary, but you continue to live in the property. If this is the case, then the gift will be deemed to be a gift with a reservation of benefit and the property will remain as a part of your estate.

So, does this mean that you can’t live there?

In order to make PET official, you need to make sure that you are not benefiting from the gift, by still being able to live in the property after it has passed to your beneficiary. However, that doesn’t mean that you can’t live there.

In order to stay living in the house you will need to ensure that you pay your children rent at the market rate. This will ensure that they do not have to pay inheritance tax on the property, however, they may need to pay income tax on the rent that they receive.

If you stay living there and you pay less than the market rent on the house, then you will find that it stays as part of your estate and therefore will be subject to inheritance tax.

This is just one of the ways that you can try to reduce or remove inheritance tax that your children need to pay out for their inheritance. Why not take a look at some of the other options and see if they will work for you?

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