Escape Starmer’s inheritance tax heist by giving the house to children

The push could increase if the Labor Party takes action potentially less than six weeks after taking power. When Tory Chancellor Jeremy Hunt proposed an IHT cut in the run-up to the election earlier this year, Labor leader Keir Starmer said he was “fundamentally opposed” and would reverse any cut as Prime Minister.

Many within the Labor Party would like to see Starmer and Shadow Chancellor Rachel Reeves go further and make the IHT even tougher.

With the value of inheritances expected to double to £230 billion a year by 2045, they see this as a way to raise huge sums to fund the party’s spending plans.

Some would like to see Starmer reduce the £325,000 zero interest rate and cut IHT-free donations so that ordinary families would pay more.

The £325,000 threshold has been falling in real terms for years, even under the Tories. It has been frozen since 2009, while stock market and property values ​​have soared, dragging more families into the IHT net.

Is there a way out then?

Former Countdown and The Weakest Link presenter Anne Robinson thinks so. She chose to give her £50 million fortune to family rather than to the tax authorities. Those with much smaller assets will also be tempted, but without careful planning the gifting can backfire.

Sean McCann, financial planner at NFU Mutual, warned that unless it is done correctly, families could still end up with an income tax, capital gains tax (CGT) or IHT bill.

If you gift your main home or a second home to children, this is considered a potentially exempt transfer, meaning you will have to live for another seven years before it is completely IHT-free.

If you die within three years, the standard IHT charge is 40 percent. Then it falls on a sliding scale.

After seven years, IHT no longer needs to be paid, but there are other things you need to pay attention to. There are few benefits to giving away your home if you plan to continue living in it, McCann said.

In that case it is considered a “gift with reservation”. “Unless you pay market rent to live there, HMRC will probably include this in your IHT calculation anyway.”

To get around this, ask three local real estate agents how much they would charge to rent the property and pay the average to your children. “Check rent regularly and keep a record of payments,” McCann said.

Many will be reluctant to pay rent, especially as their children will have to declare it to HMRC and pay any income tax due on it.

There’s another problem. “If they subsequently sell the property, they will have to pay CGT on any increase in value since you made the donation,” McCann added.

Another option is to gift some of the property to adult children living there, which will reduce the IHT bill (but not wipe it out entirely). “The catch is that they must continue to occupy the property with you and pay an appropriate share of the expenses,” McCann said.

Another risk is that the adult child could try to force the sale of the property. “Alternatively, if they move, the parent must pay market rent for the child’s share of the property, to comply with the ‘gift subject to conditions’ rules.”

If you donate your main home you will not normally have to pay CGT at that time, but your children could be hit with a bill if they sell the property later.

Donating family homes is full of pitfalls.

Shaun Moore, tax and financial planning expert at Quilter, said that if you gift a property to your child, you can stay with him or her for up to one month per year. “If you stay there alone, it’s only two weeks. Otherwise, the rules for a gift with reservation apply and it will be added to your estate when you die.”

Gifting your home to your child also means that you are no longer the homeowner and have no rights to the property. So it’s not a decision you should make lightly. “If a dispute were to arise, or if the recipient were to divorce or go bankrupt, the case could be lost.”

Also take other costs into account. “If you gift a home with a remaining mortgage, your child may have to pay stamp duty.”

If you donate a second home, higher rate taxpayers are liable for a CGT of 24 per cent. This is charged based on the increase in value since you bought it, after accounting for any money you’ve spent to increase its value, such as building an extension or new double glazing.

These are complex areas and Moore recommended seeking professional financial advice to see whether donations can reduce or increase your tax exposure.

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