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Find out more'Will giving our daughter a house trigger a tax bill?'
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As well as our home which we own together, my wife owns a property in her sole name, which is worth around £350,000. She is now considering giving this property to our daughter.
We understand that capital gains tax (CGT) will be payable on the increase in value of this property, even though no money is changing hands.
We’re less sure about the inheritance tax implications, though.
Are we correct in thinking that if my wife lives for seven years after giving the gift it’s totally exempt from tax?
A Which? Money member
'You're right - and there are other tax allowances'
Samm Galloway, Which? Money expert, says…
You’re correct – after seven years the gift will be exempt, provided that your wife hasn’t had any retained benefit from what she has gifted (such as receiving rental income).
These gifts are known as ‘potentially exempt transfers’ (PETs), because if you die within seven years of making them, they could be liable for inheritance tax.
Even if this happens, however, she may be saved by other inheritance tax rules.
The tax-free nil-rate band would cover almost the entire value of the house
These PETs - in this case, the £350,000 value of the house - are deducted from the inheritance tax allowance of £325,000 (known as the nil-rate band or NRB) before the rest of the estate.
The nil-rate band would cover almost the entire value of the house. She'd just have to pay tax on the excess £25,000.
If the gift was made more than three years before the date of death, the rate of tax would reduce from the standard rate of 40% in increments of 8 percentage points. For example, if your wife died within three to four years of giving the gift, the rate of tax would be 32%.
This all assumes that your wife doesn't leave anything else to people other than you in her will. Those other assets would likely be taxed as she'd have used up her tax-free allowance.
- Find out more: Inheritance tax planning and tax-free gifts
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