Investing the Proceeds from Selling Your Family Home and Leveraging IHT Gifts from Income Exemption
At some point, many of us will face the decision to sell the family home, whether it’s to downsize, move in with relatives, or transition into care. This sale can release substantial funds, prompting thoughts about passing wealth to future generations. However, it’s crucial to balance this with retaining enough to support your own lifestyle and cover any current or future care costs.
From an inheritance tax (IHT) perspective, there are strategies to minimise future tax bills.
Understanding Inheritance Tax and Nil Rate Bands
Inheritance tax is charged on the part of the deceased’s estate that exceeds the available nil rate bands. These include the deceased’s personal nil rate band (£325,000) and the residence nil rate band (£175,000) if the main residence or its sale proceeds are passed to a direct descendant. If the deceased was widowed, any unused nil rate bands from their spouse or civil partner can also be applied.
Investing Proceeds Instead of Giving Them Away
Instead of giving away the proceeds from selling your home, consider investing them. Recent interest rate hikes offer better opportunities to earn investment income. If this income isn’t needed for living expenses, it can be given away, leveraging the exemption for gifts out of income.
Gifts Out of Income Exemption
The exemption for normal expenditure out of income allows you to gift income without it being subject to IHT, provided it:
- Forms part of your normal expenditure.
- Is made out of income.
- Leaves you with enough income to maintain your standard of living.
Using this exemption, you could help with a child’s rent, a grandchild’s school fees, or part of a family member’s mortgage payments. The key is creating a regular pattern of spending, making these payments part of your normal monthly expenses. These gifts are then exempt from IHT and do not count as potentially exempt transfers.
Case Study
Let’s look at an example.
Linda, a widow in her eighties, moves in with her son and sells her home for £900,000. With her and her late husband’s combined nil rate bands, her estate has a threshold of £1 million. She also has £80,000 in savings and investments, generating £4,000 a year in income. Her annual pensions of £30,000 more than cover her living costs.
Linda invests the proceeds from her home sale, earning £54,000 a year in interest. After using her savings allowance and paying 2024/25 tax rates, she’s left with £35,654 after tax. If she retains this income and it forms part of her estate at death, it will face a further 40% IHT, reducing the amount her family receives.
Instead, Linda decides to use the gifts out of income exemption. She pays £1,200 a month in rent for each of her two grandchildren, totalling £28,800 a year, free from IHT. If she left this amount in the bank and passed it on at her death, it would be reduced by £11,520 in IHT, leaving only £17,280 for her family. The IHT savings more than offset any lost interest on her savings.
Need Advice on Minimising Your Inheritance Tax?
Wondering how to best invest the proceeds from selling your home or how to leverage the IHT gifts from income exemption? Contact Jon and the team at Jon Davies Accountants for expert advice tailored to your situation. We’re here to help you make informed decisions and secure your family’s financial future.
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