Our mum, 82, is selling her £1.75M home and giving us money – can we avoid inheritance

My mother, 82, is selling her house for £1.75million – it consists of two properties, an oak barn and a bungalow, but is classed as one sale. 

She wants to gift money to my sister and I to buy a property. I intend to buy a flat in London. 

She is in very good health. She has shares and money in her accounts and intends to buy a property with her partner for about £800,000 split between them both. 

Could you please tell us the best way for a lump sum to be gifted to avoid losing out to various taxes further down the line – should we set up a trust? A.S, via email

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Gift giving: The seven year rule means that with the right planning significant gifts can be given free of inheritance tax

Harvey Dorset, of This is Money, replies: With your mother in good health, there are options available to you to ensure that you aren’t landed with a hefty tax bill further down the line.

Considering your mother’s estate is well over her inheritance tax allowance, it is also a wise move for her to make arrangements for passing her assets on now, rather than wait for the taxman to take his cut upon her death.

As you say, your mother is in good health, so you can consider making use of the seven-year gifting rule, as discussed by Tom Garsed-Bennet below.

However, there are also other ways in which your mother could reduce the amount of tax that is payable both now, and when it comes to inheritance.

To find out the best way for your mother to gift money to you and your sister, This is Money spoke to two financial advisers.

Tom Garsed-Bennet says the reader’s mother could invest into a BPR qualifying solution such as AIM shares

Tom Garsed-Bennet, independent financial adviser at Flying Colours, replies: The answer may depend on whether your mother’s new property is being funded with the sale of the existing property or the shares and savings.

If your mother buys her new property with her partner before selling her existing one there would be an additional five per cent stamp duty liability to pay. 

However, that additional five per cent stamp duty could be reclaimed if she sells her current property, the so-called main residence, within three years.

As far as any gifts to you and other children are concerned (over £3,000 per annum and not from surplus income), any amounts gifted would stay within her estate for inheritance tax purposes for seven years – after which they fall outside of her estate and her inheritance tax liability.

Taper relief on gifts that are over the nil-rate inheritance tax band (£325,000), are available – this might apply to you depending on the amount your mother gifts to you and any siblings.

There are also specific inheritance tax solutions such trusts; there are various trusts, each with their own pros and cons. 

Trusts are a very complex area and it would be remiss of me to advise on a specific type here without knowing more about your situation.

Business property relief (BPR) meanwhile is another way to reduce the amount of IHT payable on certain qualifying assets. 

It was introduced in 1976 to help family-owned businesses to continue trading after a death, without the need for the shares of the whole business to be sold to pay for IHT. 

The relief rates are 100 per cent on the first £1million and 50 per cent on anything above that. It is available after an ownership period of two years.

You mother’s house would not qualify for this, but she could make an investment into a BPR qualifying solution, such as shares in companies listed on the Alternative Investment Market (AIM): AIM is a sub-market of the London Stock Exchange that allows smaller, growing companies to raise capital. 

This type of investment which would then qualify for BPR after two years if held on the date of death.

Due to the potential size of the gift your mother is proposing, I would recommend getting tailored and specific advice to get a set of structures in place that fit your exact needs and circumstances and of course, reduce any tax burden.

Oliver Loughead says the reader’s mother could take out a ‘gift inter vivos’ policy

Oliver Loughead, financial planner at RBC Brewin Dolphin, replies: If your mother sells her bungalow (her home and main residence), there will be no capital gains tax (CGT) on its sale. 

This is because the gain will be fully covered by private residence relief – if she has lived there throughout her period of ownership.

In relation to CGT on the oak barn, there are various things that will need to be considered. 

For example, was the barn sold separately from the bungalow? If so, how long between the sales? 

Further, what is the nature of its use i.e. was it for storage or was there planning permission for it to be converted into a dwelling? 

I would advise your mother to consult with tax experts ahead of its sale to ensure she fully understands her position.

Once upon a time: Inheritance tax gift limits haven’t changed since the 1980s

In regard to the gifting of money to you and your sister, there are several things to take into account. 

Firstly, it is important to ensure that your mother has enough money to live out her retirement comfortably, with possible future care being a consideration. 

For instance, does your mother solely rely on income from her investments and cash?

If your mother has established that she can afford to gift to you and your sister, there are several options. 

The simplest one is for her to make an outright lifetime gift to you both. 

This would be deemed a potentially exempt transfer (PET), as it would fully fall out of your mother’s estate for inheritance tax (IHT) purposes after surviving seven years from the date of the gift. 

To cover the potential IHT liability, your mother could take out a ‘gift inter vivos’ policy, which is a special policy that reduces the protection cover in line with the tapering that reflects after three years. 

Although many insurance companies will stop insuring people from age 80 onwards, there will be options out there.

Given the value of your mother’s assets (property, shares and cash holdings), it is likely that she will lose out on the residence nil rate band for IHT purposes. 

This is an extra nil rate band of up to £175,000 that can be enjoyed, provided she passes the family home to direct descendants, and she has a net estate of below £2million. 

However, if your mother’s overall estate value is over £2.35million on date of death, she can’t avail of this. 

By gifting assets out of her estate, your mother could reinstate this allowance in full, saving a potential £70,000 in IHT.

Lastly, in terms of the property that your mother and partner will downsize to, her partner (surviving co-owner) will automatically become sole owner of the property if they are joint tenants and your mother predeceases her partner. 

This ‘survivorship’ law overrides wills and the Laws of Intestacy and can potentially lead to complicated family disputes down the line. 

If your mother and her partner were to hold the property as tenants-in-common (TIC), these survivorship rules do not apply. 

Your mother could write her share of the property into a will trust, which protects her share from assessment for potential care fees and ensures it’s passed down as per her wishes.