Probate - Gifted Property and Inheritance Tax Explained

18 July 2019

If a deceased person transferred the ownership of their home to another person before they died, then Inheritance Tax may still be payable in respect of their home when it comes to Probate. The Inheritance Tax liability will depend on a number of factors, including who the property was gifted to, how long before the death this happened, whether they continued living there and how much the overall Estate is worth.

This article explains in which circumstances Inheritance Tax might apply to a gifted property as well as the wider rules around lifetime gifts and inheritance tax.

Who Has the Property Been Gifted To?

The first point to consider when calculating whether a lifetime gift will be liable for Inheritance Tax is who the gift has been made to. This is because certain beneficiaries are exempt from Inheritance Tax, and this exemption also applies to lifetime gifts.

Exempt beneficiaries include the husband, wife or civil partner of the deceased as well as any charities. Some political parties and other organisations also qualify as exempt beneficiaries. This means that if someone transferred ownership of their property to their wife, for example, a year before they died, then there would be no Inheritance Tax payable in respect of this transfer.

Did the Deceased Continue Living in the Property?

If the property has been gifted to a non-exempt beneficiary, and the deceased continued to live in it afterwards, then this affects how it will be dealt with for Inheritance Tax purposes. This is because the gift will be classed as a Gift with Reservation of Benefit (GROB).

In the eyes of the law, a GROB has not been fully gifted, because the person giving it away has continued to benefit from it. This would apply if the deceased gifted their property to their children, for example, who lived somewhere else, and had then continued living in the house rent free.

If the property has not been gifted to an exempt beneficiary nor had it been gifted as a GROB, then the usual rules around lifetime gifts will normally apply.

Lifetime Gifts and Tax Exemptions

If someone gifts significant cash or assets to anyone else in the 7 years leading up to their death and does not retain any benefit, then the value of these may need to be included in their Estate for Inheritance Tax purposes. This also applies to properties.

Everyone is entitled to some tax exemptions when it comes to lifetime gifts though. These are as follows:

  • £3,000 can be gifted tax-free every tax year (6 April – 5 April), or normally a maximum of £6,000 if they had made no gifts the previous year
  • A parent can give their child a gift in contemplation of their marriage of £5,000 tax free (a maximum of £10,000 from both parents)
  • A grandparent can give £2,500 tax-free in relation to the marriage
  • Anyone else can give £1,000 in respect of the marriage
  • Gifts to some charities and political parties aren't liable for tax
  • Christmas, birthday and other normal gifts can be made from a person's income, as long as they can sustain their standard of living after making the gift
  • Multiple gifts of £250 per person can be given tax-free, providing another exemption hasn't already been used

What's more, every individual is entitled to pass on £325,000 worth of assets when they die without having to pay any Inheritance Tax. This is called their 'nil rate band'.

If a person has made any gifts in the 7 years before their death, then these need to be included in the value of the Estate and declared to HM Revenue & Customs before claiming the above exemptions. This responsibility falls to the Executor or Administrator of the Estate.

If someone makes lifetime gifts in excess of the above allowable amounts within 7 years of their death, the lifetime gifts will usually be deducted from their available nil rate band. If these lifetime gifts are more than the total value of the nil rate band, then it is possible that Inheritance Tax will be payable in respect of the gifts when they die.

If Inheritance Tax is payable on a lifetime gift, then it will be calculated on a sliding scale. If the gift was made less than 3 years before the death, Inheritance Tax will be charged at 40%. If it was made 3-4 years before the death, this drops to 32%. It then deceases further for every year up to 7. If the gift was made 7 years or more before the death, then no Inheritance Tax will normally be payable.

Selling a Home for Less than the Market Value

The final point to note is that if a property is sold to a friend or relative at below market value, then this will also be treated as a gift.

For example, say the deceased owned a property which was worth £320,000 on the open market and they decided to sell it to their niece for £120,000. The £200,000 difference will be classed as a lifetime gift for Inheritance Tax purposes.

For more information, see Can I Buy My Parents' House under Market Value?

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