Tax Planning & the Family Home

Inheritance tax planning york leeds accountant

Tax Planning & the Family Home – Take care to avoid disastrous tax results!

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As the fear of Inheritance Tax (IHT) increasingly grips many families in the region, we are seeing at regular intervals attempts by less scrupulous advisors to prey on innocent home owners (often the elderly & vulnerable) with tax planning ideas which, to be frank, are not worth the paper they are written on.

So for the benefit of readers I have detailed below some examples where caution is needed if you are to avoid an IHT disaster:

1.) Always take a 2nd opinion (preferably from a Chartered Tax Advisor or Solicitor) when you are “recommended” to transfer your private residence “into a trust during your lifetime” – this area is fraught with danger & could leave you in a delicate legal position where you no longer “legally” own your home.

Often the advisor is attempting to avoid issues like Care Fees or Probate Fees but all too often the tax consequences are overlooked & as a result you or your heirs could end up with unnecessary tax charges & penalties.

In a situation like this you must ask the advisor specifically – “What are the Inheritance Tax, Capital Gains Tax & Stamp Duty Land Tax implications of giving up your legal ownership of the residence to Trustees”? If they cannot answer this question in full & with detailed analysis –  DO NOT PROCEED ANY FURTHER!

2.) Another situation we have encountered is where an individual homeowner is encouraged to transfer “not just their private residence” but also other assets as well – for example bank accounts & share portfolios into trust.

This is often done on the basis that “it avoids future claims against your estate” – especially if there are family issues or step-children involved which may make you concerned about who will ultimately inherit your assets.

Whilst in law this planning may well (artificially) reduce the assets in your estate, it could have wider tax implications depending on the terms of the Trust involved & could mean you miss out on the new valuable IHT reliefs shortly to be introduced by HMRC.

The other issue which you need to be alert to here concerns who becomes the “legal owners” of the private residence – they will be called “Trustees”. It is important your relationship with them is based on trust & a full understanding of your current & future financial situation.

3.) Finally, despite the announcement back in 2015 of the plans to introduce higher levels of IHT exemptions (“nil rate bands” up to an additional £175k per homeowner) we are still seeing homeowners trying to circumvent these increased reliefs by “unwittingly” transferring their property interests in their lifetimes.

This, for many homeowners, does not make sense as we approach 5 April 2017 when the introduction of the “residence nil rate band” commences with a potential “combined” nil rate band of £500k by 2020-21.

The introduction of “residence nil rate band” is tied in with the ownership of a private residence which is held “until death” (albeit there are special provisions applicable in the event of downsizing during lifetime as distinct from lifetime transfers) so why would you contemplate missing out on this additional relief?

It may now be the case that those homeowners who have already “transferred” their private homes look to “unravel” these arrangements to make better use of the new IHT reliefs & exemptions with effect from 5 April 2017.This could prove complicated but definitely needs further consideration in the next few months.

I have advised on IHT Planning for over 30 years – only in very selective cases would you consider using the private residence as an asset suitable for lifetime planning. It’s often just not feasible to undertake proper IHT planning without unforeseen issues.

For further advice on this topic, please fill in the contact form below, or contact – 01904 464 100

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