personal finance

How can we reduce inheritance tax on my mother's property?

Q Would I, together with my sister, be able to become a joint owner of my mother’s property so that the house wouldn’t be counted as part of her estate for inheritance tax purposes? Is this possible and if so what is the best way to go about this?

A Yes it’s perfectly possible for you and your sister to become joint owners of your mother’s house (assuming that’s what your mother wants to happen). But unless you and your sister go and live in the house with your mother – and carry on living there until her death – the whole of the value of the property rather than just the value of your mother’s share will be taken into account when working out how much inheritance tax is due. Giving away a part or the whole of something – whether it’s a property or a valuable antique painting, for example – while continuing to benefit from it makes it not a proper gift or a “gift with reservation” in the eyes of HMRC and so the whole of the property is included in the valuation of her estate when she dies. So if your mother’s estate is worth more than the £325,000 nil-rate band if she dies in the 2019-20 tax year, there will be a tax bill of 40% of the amount over £325,000. However, if your mother’s will says that the family home is to be left to you and/or your sister (or other direct descendant), the nil-rate band goes up to £475,000 (£500,000 in the 2020-21 tax year) thanks to the “residence nil-rate band” or “family home allowance” introduced in April 2017.

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If you were to continue with your plan of you and your sister becoming joint owners with your mother, the best way to do it would be to consult a solicitor. A good one would probably advise against on the grounds that it would make no difference to the eventual inheritance tax bill. He or she might also point out the other disadvantages. If you and your sister sold the house after your mother’s death, you would pay capital gains tax on the increase in value from the date your mother gave you your shares in the house rather than the date of her death so potentially a bigger tax bill. In addition, if your mother had to move to a care home, giving you a share in a property you don’t live in could be construed as a “deliberate deprivation of assets” by the local authority doing the means test to see how much she had to contribute to her care home costs. If the local authority did think that, then the value of the whole house would be used in the means test and not just the value of her share.

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