I am asking for advice on inheritance tax. My parents have decided to leave their house to their only granddaughter after their passing.
For years it was to be left to me, but I am settled housing wise and due to the cost of home ownership for first-time buyers they have changed their plans.
However, my daughter has said it seems a little unfair on me so she wants to split the inheritance two ways, so we both get an equal share of their estate. Can this be done and are there any taxation implications?
Their house would be valued somewhere around £300,000. They also own a holiday chalet worth £15,000, and cash could be in the region of £40,000.
Sharing a property bequest: How easy is it to split an inheritance left only to you? (Stock image)
Liz Alley, head of financial planning operations at Brewin Dolphin, replies: Well, the good news is that based on the value of the house and estate value there will be no inheritance tax to pay regardless of who the house is left to, as the value is below the nil rate band.
This is assuming that your parents have made no lifetime gifts and will therefore have a nil rate band of £650,000, plus an additional main residence nil rate band between them on top of that.
The main residence nil rate applies when a home is passed on death to a direct descendant. It is £125,000 per person in the 2018/2019 tax year, and is due to rise further over the next few years. Details of future increases are on HMRC’s website here.
If your parents wish to leave their property to your daughter and upon inheriting she then wishes to gift half to you, she could sell the property and share the proceeds of the sale with you.
Liz Alley: Your parents will have an inheritance tax nil rate band of £650,000, plus an additional main residence nil rate band between them on top of that
However, at this point there might be capital gains tax implications.
The beneficiary, in this case your daughter, inherits the house at its value at probate, and CGT is calculated on how much the house value has increased between the death of your last surviving parent and the sale.
The CGT threshold is £11,700 for the 2018/2019 tax year, so any gain under this won’t be liable.
Anything over this will be taxed at 18 per cent or 28 per cent depending on your daughter’s tax bracket. She can then gift 50 per cent to you.
If your daughter decides to live in the property she has inherited and gifts half and changes the title of the property to include a share to you, this then becomes a gift with reservation.
This could have inheritance tax consequences for her in the future, as any gifts she makes will be subject to the seven-year rule.
A deed of variation
This is Money adds: Another option that could be open to you is a deed of variation.
It is possible to ‘vary’ all or part of your entitlement in a will to redirect it to whoever you choose.
Provided the statutory requirements are met, the tax advantage is that whichever of your parents dies last can be treated as making the gift under their will for inheritance tax purposes (and capital gains tax, if you so choose) rather than you.
You should seek a solicitor’s advice on this.
This means she must live for seven years after the date of the gift to ensure the value of it falls out of her estate for inheritance tax purposes, if she herself had a potential inheritance tax liability.
Your daughter needs to bear in mind that both the share of the property or the share of the proceeds of the house sale gifted to you would become part of your estate.
This could eventually be passed back to her and she could be subject to an inheritance tax bill for assets she’s already been bequeathed free of inheritance tax.
Brewin Dolphin adds: This answer was prepared as a general guide only and does not constitute tax or legal advice.
While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change.
Tax treatment depends on your individual circumstances. Therefore, you should not rely on this information without seeking professional advice from a qualified tax adviser.
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