How to avoid inheritance tax on the family home
Inheritance tax (’IHT’) is a problem for anyone whose estate is worth more than the ‘nil-rate’ band (currently £325,000). The easy way to avoid IHT is to give things away since the gift falls out of account after seven years. The main asset of value for most people is the home they live in hence the reason why this is the asset that most people think of when considering how to reduce their IHT liability.
A simple gift of your home to your intended beneficiaries is unlikely to save inheritance tax because of the rules concerning gifts subject to a ‘reservation’. These rules say, in effect, that you either need to move out of your home, or you need to pay a full market rent to live there, if you want the gift to save inheritance tax. There are ’schemes’ designed to get around this problem, however these come with complications attached. Since 2005 a person who uses such a scheme must usually pay an income tax charge each year on the rental value of the property (called the ‘pre-owned assets charge’).
The following list outlines the basic choices available to anyone wanting to save inheritance tax on their home without ceasing to reside there. None of the following options gives rise to a gift with reservation or a charge to pre-owned assets tax. However there are other tax charges, and practical considerations, that need to be factored in to any decision. The options are:
1 Give your home away and pay a full market rent while you continue to live there.
2 Enter into an equity release arrangement and give the cash away.
3 Sell your home at full market value to one of your children and then give the cash away (but not to that child).
4 Give a share of your home to a child or children, who come to live with you.
Unfortunately, none of these choices are particularly popular with most people, especially once the wider implications have been properly considered. There are one or two more complicated options, but even they don’t provide a complete solution. Accordingly, the answer for most people seems to be to wait until they downsize, and to make a gift out of the excess sale proceeds at that time. However, by that time, they will have a much smaller chance of surviving the necessary seven years for the gift to save inheritance tax.
In summary, IHT savings are possible, but usually at a cost. The art lies in minimising the costs and maximising the benefits.
No comments yet.