Q I am a single parent with one daughter aged 21 who is in her second year of a six-year architects’ training course at university. I have recently been diagnosed with terminal cancer and have about 12 months left.
I own a small house in London worth about £500,000, which is my daughter’s home. My worry is that before she is able to support herself she will lose her mum and her home at the same time. With regards to paying inheritance tax, is there anything that can be done that would allow her to remain in her home until she has completed her training? JH
A The first thing I would urge you to do is to make a will leaving the house – and possibly everything else - to your daughter to ensure that she can carry on living there.
The second thing to do is to seek specialist tax advice on ways in which you can legitimately reduce a potential inheritance tax (IHT) bill. It is highly likely to be in your and your daughter’s interests to give her money while you are still alive. You can give her £3,000 a year IHT-free (or £6,000 if you didn’t give her £3,000 in the last tax year). Gifts over that limit become tax-free only if the donor is still alive after seven years of making them. But because she is still in full-time education, there is no seven-year limit – and so no IHT implications - for any gifts of money or capital (which might include property) that you give her for her maintenance or for the costs of her education and training.
However, even if you are able to make such tax-free gifts, the value of your London home is still above the current “nil-rate band” for IHT of £325,000 (in the 2015-16 tax year). So there is likely to be an inheritance tax bill of 40% of the amount of your estate above £325,000.
There is a small concession available to people who inherit property that they decide to live in. Instead of having to pay the inheritance tax bill all in one go, they can pay it in 10 equal annual instalments – plus interest – more than 10 years.
If you left your London home to your daughter and it was your only asset, there would be a tax bill of £70,000, which would mean an annual instalment of £7,000. To make sure that your daughter was able to pay that, the next things I would urge you to do is to make sure that any life insurance you have is written “in trust” so that any money paid out goes directly to the beneficiary of the policy and is not paid into your estate. Check with any pension you have – whether private or an employer’s scheme – that you have filled in a nomination form in your daughter’s favour so that any money that may become due goes directly to your daughter; and make a list of all your bank accounts, investments and so on to keep things simple for the person who will be dealing with your will.
You don’t say whether you have a mortgage on the property, but if you do, you also need to talk to your lender. It may be that you need to consider downsizing to a mortgage-free home to ensure that your daughter has somewhere to live.
