Inheritance tax: How you can give away your house and pay zero tax

Inheritance tax: Financial advisor provides advice

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Housing prices in the UK continue to skyrocket with the average house price being £281,000 in April 2022 according to the Office of National Statistics (ONS). This is around £31,000 more than the same time last year. Inheritance tax is a tax paid on the value of a person’s estate when they pass away. Houses are usually the most expensive asset they own and can cause their estate to pass the nil rate band threshold for inheritance tax.

Currently, the threshold stands at £325,000.

You do not pay any tax below this figure however, anything above will be taxed at a rate of 40 percent.

An example of this is if the value of an estate is £450,000 then a person’s loved ones will only pay the 40 percent tax on the £125,000 over the threshold.

Britons are able to pass on their home, free from inheritance tax, to their spouse or civil partner when they die.

They can also increase the tax-free threshold to £500,000 if they gift it to their children or grandchildren.

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Children who are adopted, fostered or stepchildren also fall into this category.

However, the person must own, or own a share, in the property.

The estate also must be worth less than £2million.

If Britons want to leave their house to anyone else, this will count towards the value of their estate.

There are ways that Britons can pass on their property whilst they are still alive to cut down the liability for their loved ones when they die.

People can gift their property away if they move out and then live for another seven years, due to what is known as the seven year rule.

This is due to the seven year rules.

According to these rules, gifts given in the three years before the death are taxed at the full 40 percent.

Anything given three to seven years before the death is then taxed on a sliding scale known as ‘taper relief’.

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Between three to four years, the gifts will be taxed at a rate of 32 percent.

Between four to five years, it will be taxed at 24 percent.

If the person dies five to six years after the gift it will be taxed at 16 percent and between six to seven years it will be taxed at eight percent.

If Britons want to continue living in their property after giving it away they will need to pay rent to the new owner at the going rate.

This means it has to be similar to local rental properties and not discounted due to being a family member or friend.

They will also need to pay their share of the bills, or live there for at least seven years.

Otherwise, it counts as a ‘gift with reservation’ and will be added to the value of their estate.

A gift with reservation is a gift that is not fully given away because the person making the gift keeps back some benefit for themselves.

Sometimes people do not have to pay rent, which applies when a person has only given away part of their property and if the new owners also live in the house.

Both of these rules need to apply here.

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