Why a one-year wait for inheritance?

By THIS IS MONEY
Updated:

 

My father who has bad health and elderly has said he would like to give me one of his houses which at present is let out to tenants. My intention would be to live in it once its signed over.

He is leaving his other assets, including much land, to his younger wife - my stepmother.

Because of his health/age he has told me he will gift the house to my stepmother now and she will then gift it to me after one year otherwise tax will have to be paid.

Why does she have to keep the house for one year to avoid tax? Is this correct? - CJJ

Mark Giddens of UHY Hacker Young replies: Your father has in mind that gifts within seven years of death are subject to inheritance tax (IHT), but that those between spouses are generally exempt.

So, a gift from your father to your stepmother would escape IHT liability, with her subsequent gift to you also assumed to be IHT-free provided that she survives for seven years. The one-year delay is presumably intended to make the first gift appear real and unconditional.

There are two dangers here. The first is that if the gift to your stepmother appears to be tied to the onward gift to you, the transactions are open to attack by HM Revenue & Customs as 'associated operations'. The second danger is that no account has been taken of Capital Gains Tax (CGT) which would normally arise when the property is gifted from your stepmother to you. As this is property, the CGT involved may be quite significant.

Your father needs to take further advice as a matter of urgency. There are options available in these circumstances that may enable him to transfer the property to you free of both inheritance tax and capital gains tax.

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