Rental value

My father died last year and we discovered he had accumulated a great deal of wealth from investing in shares. My mother has a secure income and wants to reduce the liability to estate on her death. She is 86 and in good health. She is considering gifting her house to my brother and me but continuing to live there. What should she look out for?

If your mother gifts the property to you and your brother but continues to live in the house, she will not have reduced the value of her estate for inheritance tax purposes.

It would constitute a retained benefit for tax purposes unless, of course, the property was passed to you on a purely commercial basis and she paid a commercial rate of rent to you and your brother in order to continue to live there. On the surface, this might sound a little odd, gifting something and then having to continue to pay for it, but it can work to reduce the overall inheritance tax bill.

The gift of the value of her house will be a potentially exempt transfer and you may be aware that she will need to survive for a further seven years before the value passes completely out of her estate. If she survives for between three and seven years, the rate of inheritance tax on the value of the property will be reduced.

Interestingly, a quick look at the life expectancy tables suggest that a woman of your mother’s age in good health has an expectation of life of some 6.17 years so that may give you a feel for the potential for any savings. Of course, each individual has their own life expectancy.

One thing that you might consider doing, although I suspect that the premiums may be quite high, is to insure your mother’s life over the seven-year period and arrange for that policy to be in trust so that in the event of her death, there was money available to the two of you to pay the inheritance tax bill. As part of an inheritance tax mitigation plan this might be well worth considering.

You state that your mother has a secure income and I think you mean pension income. You will need to be confident that she can continue to have the lifestyle that she requires if she pays a commercial rate of rent to you. The rent that she pays to you will come from her taxed income and thus it is her net income, that will be reduced by this scheme.

The rental income that she pays to you and your brother will be taxable income in your hands. The amount of income tax that you pay will depend upon the other taxable income that the two of you have.

An alternative, or possibly a concurrent action, worth considering is that if she can afford to pay you the proposed rent from her income, then it would imply that she could simply gift you these payments from her income without reducing the quality of her life. Such gifts out of income would have the overall benefit of reducing the value of her estate and would be income- tax-free in the hands of you and your brother.

I wonder if the surprise that you got in discovering that your late father had accumulated such wealth is causing you to be over-concerned about inheritance tax liabilities. As it stand,s you are likely to inherit a significant sum.

While no one likes the thought of paying inheritance tax, sometimes the cost of action can be a barrier to taking action.

The other thing for you and your brother to consider is that if your mother does gift the property to you, when you sell it, there will be capital gains tax to consider. That said, CGT is likely to be less than inheritance tax. I would definitely advise you all to take suitable legal advice before you complete such a transaction.

Nick Bamford is chief executive of Informed Choice