The house given away but still occupied
Margaret, a widow aged 78, transferred her house worth £450,000 to her two children in June 2020. She continued to live there rent-free, paid no rent, and the children paid none of the bills or improvements. The children are the legal owners. In May 2021 Margaret gave £50,000 cash to her grandson. In August 2022 she gave £10,000 to a friend. She has made no other gifts. Her remaining estate is savings £250,000 and investments £150,000. Her husband died in 2005 having used all his nil rate band. Assume no residence nil rate band is available and ignore any transferable nil rate band. Margaret dies in September 2025. She had not made any annual exemption elections before the gifts.
1. Explain the inheritance tax treatment of the house transfer.
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The house transfer is a gift with reservation of benefit. Margaret gave away the legal title but continued to occupy the house rent-free, paid no market rent and the children did not pay the expenses. She retained a significant benefit. The gift therefore does not qualify as a PET. The value of the house remains part of her estate for IHT at death. The children's ownership does not remove it. There may also be an income tax charge under the pre-owned asset tax rules, but the main IHT point is that the house is still in the estate.
2. Calculate the IHT on Margaret's estate, showing how the cash gifts use the nil rate band and any taper relief.
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The cash gifts are PETs. For the May 2021 gift of £50,000, deduct the 2021/22 annual exemption £3,000 and unused 2020/21 exemption £3,000, leaving £44,000. For the August 2022 gift of £10,000, deduct the 2022/23 annual exemption £3,000; no carry-forward remains because the 2021/22 exemption was used, leaving £7,000. Total PETs = £51,000. These use the nil rate band first: £325,000 - £51,000 = £274,000 available against the death estate. The estate is house £450,000 + savings £250,000 + investments £150,000 = £850,000. Taxable estate = £850,000 - £274,000 = £576,000. IHT at 40% = £230,400. Taper relief does not reduce the tax because the PETs are fully covered by the nil rate band; if tax had been due, the 2021 gift (4 years before death) would attract 40% taper.