IHT planning with the family home

Anti-avoidance

You’re probably familiar with the seven-year rule that prevents you giving away everything on your deathbed to avoid inheritance tax (IHT). It applies to most gifts, and as long as you survive at least seven years there’s no IHT to pay. It’s a pretty simple rule yet some still misinterpret it. The key word is gifts. Think about the last gift you received, perhaps for your birthday. Did it come with any strings attached? In the unlikely event that it did, it wouldn’t really be a gift would it?

Example. Laura is turning 18 and her father tells her he’s giving her his car as a birthday present. Overjoyed, she arranges to pick up some friends. Her father then tells her he needs the car to get to work, and what he really meant was that they could share the car. Laura can only use the car if he doesn’t need it, which will usually be on Friday evenings.

In our example, it’s pretty clear that Laura’s father hasn’t gifted ownership of the car to her because he is still using it. The same logic can be applied to gifts made in an attempt to reduce IHT. Due to anti-avoidance rules, if you continue to benefit from the asset, the seven-year clock won’t start and the asset remains in your estate for IHT purposes.

If you cease to benefit from an asset you gave away, the seven-year exemption period starts at that point.

Giving away your home

You can’t give away your home and continue to live in it. Well you can, but it’s ignored for IHT purposes unless you undertake planning to meet one of the exceptions to this rule.

Become a tenant

You can gift the property to your children and pay them rent to continue to living in it. Providing the rent is paid at market value, and you’re not benefitting from the gift, the gift works.

Ask an estate agent to give you a rental value and review it regularly.

If you have sufficient income or savings to pay the rent, this will further reduce the assets in your estate and potentially the IHT. However, the income will be taxable for your children. This may not be a terrible idea if they’re not taxpayers, but you’ll need to do the sums because rental prices have soared and the market value may come as a shock.

Give away some, but not all of it

If one or more of the children live in the property with you, or you’re willing to let them move in, you can gift them a share of the property, and continue living there without falling foul of anti-avoidance rules. In these circumstances the seven-year exemption clock starts immediately.

To do this effectively, you will need to set up the ownership as tenants in common with your solicitor.

Example. Richard lives with his elderly, divorced mother. Her home is worth £850,000 and she transfers a 50% share of the ownership to Richard. The gift is effective and the seven-year period begins on the date of the gift. Richard must not pay all the bills as this would count as his mother benefitting from the gift. They can share the cost of the bills or his mother can pay them. After seven years, the gift reduces the value of her home to below her available allowances, saving up to £170,000.