Tax Q&A: What’s the best way to give away a property and not pay inheritance tax?

That’s all for today’s Q&A. Thanks to those of you who sent in a question and apologies if you did not get an answer to your question this time. Fear not, if you’ve got a question that hasn’t been answered, you can send it to taxhacks@telegraph.co.uk or comment at the bottom of this article and we will try and get it answered for you. 

You can follow the week’s most important tax, property, investing and pensions news, analysis and tips by signing up to The Telegraph Money Newsletter.

A final question now from reader R Hemmings.

R Hemmings wonders: “If I transfer money from separate platform holdings (my wife and I) via a joint bank account as gifts to our children, are they still treated separately for the seven year inheritance tax rule?

Mike clarifies: “Gifts from a joint account are treated as equal from each of you unless there is evidence to the contrary.”

Another question on inheritance tax.

A McKay asks: “As a single person my inheritance will be left to my nephews. How can I/ they avoid paying inheritance tax on my house and savings? The combined sum may well be over £325,000.”

Mike suggests: “If you have always been single your options are unfortunately limited. If you were previously married it may be that your executors could claim an unused nil rate band after your death but that would depend on the circumstances. Sadly you will not qualify for the £175,000 residence nil rate band because your nephews are not your lineal decedents. The HMRC manuals explain this at IHTM46013. 

You could consider lifetime gifts, but make sure you keep enough for your own needs.”

Up next, a question on the gifts from excess income concession for inheritance tax.

Barry wonders: “I am using the gifts from excess income concession for inheritance tax. I am not clear on how detailed my recording needs to be to satisfy HMRC. I have sent the letters to recipients saying I am making the gifts and recorded gifts and dates and also my estimated income and outgoings according to the schedule shown in the tax guide.

“However, there are numerous large transfers in and out of my account as I seek better savings rates, investments mature etc. Obviously, my executors will not be able to interpret all this movement. I have saved all my bank statements, credit card bills etc. and used these to estimate my spending. So, I need to know how much detail of my day to day outgoings, large transfers I need to record to satisfy HMRC?”

Mike replies: “The simple answer is that the better your records are the better you executor’s chance of having the claim accepted. My mother made regular gifts for the last five years of her life and I kept details of her income and spending. After she died HMRC were very helpful in dealing with this and I had no difficulty obtaining the relief for her estate.”

Greg asks: “Dear Mike, can a cohabiting couple distribute the rent on a house owned by one of them to be tax efficient? And can a married couple do so?”

Mike explains: “The rent received for income tax purposes will follow the beneficial ownership, which is not necessarily the legal ownership. A cohabiting couple could arrange to transfer part of the beneficial ownership and so share the rental income but this might trigger capital gains tax (CGT). 

“If there is a mortgage your lender will need to agree and there is a risk of Stamp Duty Land Tax if the debt is transferred. A couple who are married or in a civil partnership will not have to worry about CGT but SDLT could still be an issue.”

Now for one about which many of you might be wondering.

Here’s Mike’s response: “I agree that it has become much more difficult to obtain help from HMRC. In the past you could visit your local office in person. Someone would collect your file and either explain the situation for you or make the changes required.

“The closure of local tax offices may have saved money for the Treasury, but it has certainly not improved accessibility. There seems to have been an additional problem since the pandemic with a backlog of mail and slower response times on phone calls. Politicians are aware of the issue and recently issued a damning report demanding improvements. Perhaps the Chancellor will have something helpful to say on this in his Autumn Statement.”

Up next, a reader is wondering whether his wife qualifies for the extra £5,000 allowance from deposit accounts.

Michael asks: “My wife has a pension which is under the personal allowance. Does she qualify for the extra allowance of £5,000 from deposit accounts? How much do you need to be under the personal allowance to get this extra £5,000?

Mike answers: “The full £5,000 nil rate savings band applies where other income, such as your wife’s pension is less than her personal allowance. Once the other income goes above the personal allowance the £5,000 band reduces accordingly.”

Patrick wants to know if he can cut his capital gains tax bill. 

Mike says: “Unfortunately, there are no easy answers to this. Property tends to be a long-term investment and this can create a tax headache because much of the rise in value is due to the general level of inflation rather than a growth in real value.  

“It can help for a couple to split the ownership where they are married or in a civil partnership because this can be done without CGT applying. You can then take full advantage of your respective CGT nil rate and basic tax rate tax bands.

“Sometimes you can split the ownership with adult children through a declaration of trust. A gain would be made on the transfer but they would take their share of the property at market value for calculating their gain on a subsequent sale. In this case, it would be important that they did not simply return the proceeds to you because HMRC could otherwise regard them as simply nominees for you.”

A final few questions. George has one on whether Inheritance Tax allowance is discriminatory.

George wonders: “Is the IHT allowance for property to children or grandchildren discriminatory to single people with no kids? And is this discrimination allowed?”

Mike answers: “Unsurprisingly there are differing views on this one, George. It is the law and parliament are sovereign, or supposed to be!”

A property related tax question up next, from GW.

Mike replies: “There is no simple answer on this if you have an existing property at the time, either in the UK or overseas, because the rules state that the additional three per cent duty applies. In saying this I am making an assumption that you are married or in a civil partnership. If that is not the case and only one of you owns a property currently you might consider arranging for the investment property to be bought by the one that does not have an existing property.”

Reader Jak would like to know if the Government will add a cost of living payment to certain allowances.

Jak asks: “Are the Government considering adding a cost of living payment to those in receipt of Personal Independence Payment, Disability Living Allowance, and Carers Allowance as per National Energy Action demand for the upcoming Budget?”

Mike says: “I am expecting some help for families, Jak, but I am not sure in what form.”

An interesting question now from Niamh on whether she should take a pay cut.

Here’s what Mike has to say: “The way the rules apply does seem irrational and unfair. If you each earned £99,000 you would qualify but if one of you earned £101,000 and the other earned £20,000 you would not. I suppose the answer must depend on how much each of you is earning over the threshold. There is no point in one you cutting your hours if the other one does not. However, if you are both only just over the threshold it might be worthwhile. It is a matter of doing the sums I’m afraid.”

Now, a question on premium bonds.

Martin asks: “Are premium bonds a good tax-free alternative or a waste of time?”

Mike responds: “I have the full quota allowed, Martin, and win something most months. It is not just the tax-free element that I like but the warm feeling of having a win, even of only £25. Not very logical but a human reaction.”

Now, a question from the comments section on inheritance tax.

S.D wonders: “I have done my calculation regarding house and investments outside of my pension. My pension is solely a self-invested personal pension. What happens to the balance if I die before my wife and then when she dies and any balance passes to our kids? Also, if my wife died before me and it passed straight to my kids?”

Mike explains: “Under the current pension rules the pension fund can be transferred for the benefit of your wife on your death and if she were to die first the fund could transfer for the benefit of your children. The value would be outside your estate for IHT but pension drawn would normally be subject to income tax . However, if you died before reaching 75 it can be taken tax free. I am not sure if this will apply after the next election!”

Now for a question on income tax.

Mike says: “Sadly, there is not much that can be done to overcome this increase of tax bills by stealth through the impact of high inflation. Couples should make the most use of their personal allowances as well as their annual savings and dividend allowances by splitting their assets. You should also make the most of tax relief allowed on pension contributions and take full advantage of your annual ISA allowance.”

Reader Michael has another question on stamp duty, but for buy-to-let properties.

Mike responds: “I fear not, Michael. The buy to let market is suffering at the moment with landlords selling up. This is reducing the number of properties available and pushing up rents, but I do not expect the three per cent surcharge to go yet. It is not seen as a priority by the Government.”

A reader is curious to know what might happen in regard to Stamp Duty Land Tax (SDLT) ahead of the Autumn Statement.

Calvin asks: “What do you predict will happen with stamp duty in the Autumn Statement?”

Mike answers: “I am predicting some help with SDLT, possibly an increase in the £250,000 threshold.”

Max wants some advice from Mike. This time, on self-employment.

Mike advises: “It can save both income tax and National Insurance contributions. However, there may be no benefit if HMRC would have treated the arrangement as an employment rather than genuine self-employment had it been supplied directly to the customer. This can be a major issue for contractors who have set up service companies where an inconsistent application of the IR35 rules has resulted in a state of confusion with many contractors paying more in tax than the law strictly requires and others left uncertain whether they could be exposed to back taxes.”

The next question comes from the comments section, asked by Telegraph reader Helen Clarke.

Helen wonders: “I have recently been made redundant and, as I’m nearly 56, I’m thinking of commuting the payment to pension - everything above the £30,000 tax free lump sum. Am I right to do so and could this also be offset against wages this year to date, resulting in a potential tax rebate?

Mike suggests: “In your circumstance, it could well be worthwhile taking the opportunity to top up your pension and save tax. Most of us save too little in our pensions.”

Next up, we have a question from Richard. 

Richard wants to know: “Instead of cutting taxes, why doesn’t the Chancellor restore the personal allowance? It was only modified as part of the austerity measures, how much would it cost to do this?”

Mike replies: “This is a bugbear of mine, Richard. Personal allowances should rise each year with inflation under the Rooker-Wise accord. Gordon Brown was criticised for not doing so and they fell behind. In the coalition government they increased at the insistence of the Lib Dems. Now, they are frozen again. It makes it very difficult for people to plan their financial affairs.”

AM has a question on inheritance tax.

Mike replies: “As far as IHT is concerned, any asset can be given away without IHT applying and as long as there is no reservation of a benefit it will fall out of their estate after seven years. The problem with property, and shares for that matter, is that a gift can trigger capital gains tax because the gift is treated for the tax as a sale at market value. One way of avoiding CGT is by making the gift into trust which does not take the donor over their available nil rate inheritance tax band.

“This would, however, require taking some detailed advice on possible IHT consequences in the trust.”

Annette now has a question on pensions. 

Annette asks: “Why was the basic state pension not merged with the new state pension - basic state pension is some £2,000 less per annum?”

Mike says: “The new state pension is set higher than the old state pension because on the old arrangement you could accrue extra income from SERPS and the state second pension. This was essentially for employees so not everybody was able to do so. It seems unfair for those who were in self-employment, as I effectively was for much of my career in a partnership.”

Another query on inheritance tax, this time from J D Haan.

J D Haan says: “I have a disabled child and wish to provide for him in the future. We are using our capital to generate income to care for our son and an elderly relative. So the income is a priority, but so is keeping IHT to a minimum. We need to use the capital in the interim for income so can’t just gift it to our son. A bit of a dilemma.”

Mike responds: “This is a situation where a disabled person’s trust could help. This arrangement is essentially a discretionary trust with income tax, CGT and IHT benefits. I might write an article on this where I can go into the details.”

Next, Sascha wants some advice on pensions.

Mike explains: “The simple answer would be to ensure that you crystalise all your pension funds before the next election and start taking benefits. Under the rules that have applied until recently it would prevent a subsequent lifetime allowance charge. However, it is not as simple as that. 

“Firstly, it will depend on your age, the size of your fund and when you plan to retire, as well as what type of pension you have. Whatever you do it is possible that an incoming Labour chancellor could introduce forestalling legislation to remove the benefit. For example, there has been a catch all in the legislation that previously applied at age 75 to test any uncrystallised funds against the remaining lifetime allowance. I imagine that it would be possible for this test to be changed to bring back into testing all funds crystalised since the abolition of the charge where this was done deliberately to avoid its reintroduction. 

“For those concerned, I would strongly recommend reading an excellent paper on the subject written by Sir Steve Webb which you can find here.

“Steve was pensions minister in the coalition government and probably knows more about the subject than anyone else in the country. He makes the valid point that it would not simply be a matter of reintroducing the old legislation wholesale. He does not offer a simple answer for the good reason that there isn’t one.”

Here’s another question from the comments section, the time from Penny.

Penny asks: “Do you think the Chancellor will increase the VAT allowance for self-employed people? It hasn’t increased for several years and those who have one employee, like my husband who is a builder, cannot increase his ability to earn more as his turnover takes him over the tax threshold.

Mike says: “I think he should, but that is sadly not what I am expecting. I guess we have all had examples of trying to find someone to do some building work and being told that the builder cannot do it yet for fear of going over the threshold.”

Next, reader James has a question on inheritance tax.

James wonders: “Would it not be simpler for inheritance tax (IHT) to remove the value of the principal residence from the estate total, rather than adjust thresholds or percentages?

“It strikes me that most ‘smaller’ estates are only tipped into the IHT bracket by house values, as opposed to investments and financial holdings. And yet, the late owner can’t do much about house values: location, or a function of a wider market. Without having the available data, which HMRC certainly will have from the Probate Office, this might remove a majority of estates from IHT, while only losing a minority of revenue.”

Mike explains: “This has certainly been considered and I think the Office of Thrift Supervision, Department of the Treasury came up with this recommendation. The Government’s concern is that it would encourage more investment into residential property which is regarded as unproductive and may push up house prices. Although I do not necessarily agree.”

Up next, reader DJ EA has a couple of questions for Mike. 

DJ EA asks: “Given the historical evidence that tax cuts frequently result in increased tax revenue, particularly in regard to capital gains tax (CGT), is there a model that could ‘predict’ the likely changes in tax revenue that increasing the lower tax threshold to either £15,000 or £20,000 would bring?

“Additionally, why does the Government only look at increasing tax to meet revenue rather than matching spending to revenue?

“Final question, the most effective and efficient tax code in the world was that of Hong Kong, it was, until recently, just 276 pages long. Ours is 29,000 pages and growing. Why can this not be reformed?”

Mike answers: “There have been examples where tax cuts increase revenue but not as often as claimed. The Government issue a ready reckoner which shows what they think would happen with changes to rates and thresholds but it is very difficult to determine how people will react to such changes so it is at best an estimate.

“We certainly need to drastically simplify our tax code - which is the longest in the world.”

Now for our first question from the comments section. 

John asks: My salary is £50,000 and I am scared to take a pay rise. Above this I would pay 40 per cent tax, two per cent NI, nine per cent undergraduate loan repayment, six per cent post graduate loan repayment and lose £2,100 a year in child benefit. I need extra take home, but I would be at a loss by working more. My marginal rate is more like 95 per cent. Are there ways to make the pay rise worthwhile? 

Mike responds: John, I have to agree with the other comments. What a ridiculous system where you are on a 95 per cent marginal rate that clearly discourages work. A partnership with your wife should certainly be considered.

Another question for Mike, this time from Carol, ahead of the Autumn Statement.

Mike says: “I am going to cheat and name two policy issues which continue to have a serious impact on many small enterprises. 

“The IR35 intermediaries legislation announced by Gordon Brown in 1999 seemed a reasonable response at the time to the growth of personal service companies specifically designed to reduce income tax and National Insurance. Unfortunately, he failed to take the opportunity to clarify the rules on what does and does not count as an employment. That has been left to the courts to decide which - in a series of confusing and contradictory judgements over the last 20 years - has, frankly, left a total mess.

“When major government departments misunderstand the rules and omit to pay tax of over £100 million, something is clearly wrong. This problem has been highlighted by the case of broadcaster Kaye Adams who, having won her case at two previous court hearings, was told by the Court of Appeal that she would have her case referred back to the tribunal because the earlier judges did not understand the rules and were applying the wrong test. This would be bad enough if HMRC were paying all the costs but the reverse is true. Kaye is already left with costs many times the tax claimed by HMRC, and she has been shown to be in the right! There are thousands of contractors facing the same problems. Small businesses are vital to the economy and deserve clarity on what the rules are and the assurance that they will be applied fairly.

“By the same token, many taxpayers have been treated in a wholly unfair way with the introduction of the loan charge through the application of retrospective legislation. It is a personal view but I regard retrospective legislation as a total anathema and I am frankly appalled that this government has thought it acceptable to act in this way. We have had households torn apart and suicides are now into double figures.  

“I appreciate that many readers will say that those caught up in this should have known better and recognised the risks of entering into something that looked too good to be true, but it did not seem that way at the time. I have spoken to some who were told by their employers that to save costs for the company they had to accept this arrangement, approved by their accountants, or face redundancy. They were typically not well versed on financial matters. They received no personal financial benefit from doing so but now face bankruptcy and financial ruin for their blameless families.”

Our first question from Bill asks for Mike’s predictions ahead of the Autumn Statement.

Mike responds: “The Chancellor is facing a growing debt burden and is not in a position to offer large tax cuts. He is also concerned that cutting personal tax might lead to higher inflation. However, all chancellors like to announce some good news, if only to catch a few positive headlines. 

“I think he will try and help savers who are facing higher income tax because of cuts in the savings and dividend allowances, in addition to frozen personal allowances. An increase in the ISA limit coupled with more flexibility would cost little in the short term but would be welcomed by many.

“With the housing market depressed by higher mortgage rates I think he could help homeowners and housebuilders by increasing the Stamp Duty Land Tax (SDLT) starting threshold from £250,000.

“I am also expecting some recognition of the difficulties being faced by families with young children. There is a reasonable chance that he will increase the clawback threshold from £50,000. I appreciate that this income may seem high to many readers but it will not seem that way for many bringing up a family at a time of high inflation and increasing mortgage rates. Ideally, I would like to see wholesale reform of the High Income Child Benefit Tax Charge to base it on overall household income rather than that of the highest earner, which from the outset was clearly unfair.  

“Hopefully, he will take the opportunity to confirm that stay at home parents will not miss out on state pension benefits by failing to register for child benefit, often because they would have had it clawed back.

“I do not expect the chancellor to respond to the Telegraph campaign by abolishing inheritance tax (IHT), but he might cut the rate from 40 per cent and he could afford to make increases in some of the smaller allowances including the £3,000 annual allowance.”

Hello all. This Q&A will be getting underway in just 30 minutes. Our tax expert, Mike Warburton, is on hand to answer your tax-related questions ahead of the Autumn Statement on Wednesday.

Please leave your questions in the comments section below for our expert to answer.