Inheritance tax parent's rent contribution

[Nicolas10]

Think of a parent who has two children and two properties and gives one to each child. She lives permanently in one of the two properties but doesn't pay rent which means that property will not get a total inheritance tax exemption after seven years from the transfer to that child.

The question is will the second property where she doesn't live also lose its total exemption after the seven years? Or will it still be eligible for it?

Thanks

[jpkeates]

The other gift is without reservation, so it should be outside the estate after 7 years.

[Nicolas10]

Thanks JP Keats, I must make a clarification I forgot to mention that the parent kept one third of the ownership of the house where she does not live.

So the first house she gave fully to one child and she lives there rent free.

The second house she gave two thirds ownership to the other child (son) and kept one third for herself which will be transferred fully to him after her death.

Of course the tax exemption question after seven years concerns the second house.

[Gordon999]

Inheritance tax starts above £325K level or up to £500K if the family home is willed to children or grandchildren.

If parent remains living in the house after gifting , without paying market rent, the property is counted in the estate for iht.

[jpkeates]

Thanks JP Keats, I must make a clarification I forgot to mention that the parent kept one third of the ownership of the house where she does not live.

Yes that makes a difference.

What you have there is something of a shambles from a tax planning perspective.

[AndrewDod]

Did you pay capital gains tax when you gifted them????

[Nicolas10]

AndrewDod, yes capital gains tax was paid.

jpkeats, the value of one third of the second house can be easily covered by the tax free allowance of £500,000 so this shouldn't be an issue. But in case you know does this impact the inheritance tax exemption after 7 years for the other two thirds?

[Gordon999]

Normally assets gifted away are not counted back in estate for inheritance tax if the donor survives for seven years or more.

But this rule does not apply to gifted assets which the parent continues to receive benefit ( e.g living "rent free" in first house ) .

For the two third interest in second house, is parent receiving rental income ?

[Nicolas10]

Hi Gordon, the parent is receiving one third of the income from the second property to match her one third ownership and will do so for as long as she lives. The other two thirds of the income go to the child that inherited them.

[Gordon999]

So after surviving 7 years, the two thirds share in second property should escape from parents's estate. Better if you check adequacy of rental records to show apportionment of one third /two third rental income with a tax professional.