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Inheritance Tax Planning & The Family Home

Robert Peel Tax Consultant

Robert Peel, Senior Tax Consultant at Garbutt & Elliott, looks at the recent changes to Inheritance Tax legislation in relation to tax planning for the family home.

Recent changes to Inheritance Tax (IHT) legislation have made IHT planning simpler in that the IHT nil rate band, currently £312,000, can now be transferred from one spouse to another if this was not used when the first spouse died. This has meant that complex will structures involving the use of trusts may no longer be appropriate for joint estates that fall below £624,000 being twice the level of the nil rate band. Simple wills that leave everything to the surviving spouse are all that will be needed to avoid IHT. Previously this would have meant a tax bill of £124,800.

Although these changes are welcome and will simplify matters for a large number of people there are still large numbers who whose main asset is the family home and the value exceeds £624,000 and whose families are therefore facing a large IHT bill when they die. There are measures that are still available that they can take in order to reduce the impact of IHT.

The first option to consider would be to sell the property and downsize thus releasing capital that can either be used to fund gifts to children now or to provide an income in an IHT efficient manner.

If it is not desirable to sell the house outright then there are commercially available equity release schemes that would provide capital to fund lifetime gifts by providing a lifetime mortgage. On the second death the house would then be sold and the proceeds used to repay the mortgage and interest and any balance left over would be available to distribute to children. The outstanding debt would reduce the amount chargeable to IHT.

If your children still live with you it is possible to gift them a share of the house and the amount gifted would fall out of your estate for IHT purposes if you survive the gift for seven years. You would need to be careful with this type of arrangement in that the children would have to occupy the house with you and pay no more than their fair share of the running expenses. If they moved out in the future you would be faced with the prospect of having to pay them a full market rent for their share in order to avoid strict tax anti avoidance legislation and ensure that the value of the interest gifted remains outside of your estate.

You could also consider what is known as a full consideration lease scheme which involves you gifting the property to your children, whether they lived with you or not, and then paying them a full market rent to continue occupying it. Again, you will need to be careful with the arrangements in order to avoid tax avoidance legislation operating and this would involve reviewing the rents paid on a regular basis to ensure that it is at all times a full market rent.

You could consider a sale and loan arrangement with your spouse. This involves one spouse selling their half share to their partner for full market value but leaving the proceeds outstanding as a loan. The benefit of the loan is then gifted to the children removing that amount of value from your estate after seven years. Although the house is still owned by one spouse it is then subject to a mortgage in favour of the children and both parties are able to carry on living in the house rent free and avoid the anti avoidance legislation.

Finally, if none of the above arrangements are suitable then consider life insurance cover. This will not reduce the amount of IHT payable but would produce a lump sum on death to enable the IHT to be settled and may avoid a forced and rushed sale of the property to meet any IHT liability.

Do also bear in mind that where property is involved the Revenue will allow you to settle any IHT by 10 equal annual instalments but will charge interest on the amounts outstanding and the current rate is 4% a year and would expect the tax to be paid in full if the property is subsequently sold.

There are anti avoidance rules to prevent you trying to make gifts that are effective for IHT purposes but enables you to carry on enjoying the property gifted and you should take professional advice if you are considering any of the above arrangements.

Robert can be contacted at the Leeds office, or by email to rpeel@garbutt-elliott.co.uk.