Inheritance tax planning – Don’t forget your family home

Ralph Mitchison - Menzies Accountant

Ralph Mitchison – Property Specialist

Your family home is likely to form a significant, perhaps the largest, part of your estate yet is often overlooked. There are however potential IHT planning points to consider and pitfalls to avoid.

Here are some questions you should consider in relation to current IHT your family home:

How is the home legally owned?

Do you still want or need to live in the home?

Do you want to pass on your home or other asset to your beneficiaries?

Gifting your family home

Will you need to retain some use/benefit?

If you give your home away but continue to live in it, special rules apply and your estate or the person you gave your home to might still have to pay Inheritance Tax on the property when you die, together with other taxes including Income Tax.

A possible solution to this is to pay a market rent to the new owner, the level of rent payable will need to be independently assessed.

If you do give your home away and move out, you can still make social visits and stay there for short periods, but take care as there are rules as to how frequent the visits can be.

Can you make an outright gift?

If making outright gifts of the property, generally the value of the ‘gift’ falls outside inheritance tax if you live for a further 7 years after making the gift. Therefore if you are in a position to ‘gift’ your home with no conditions attached and survive for 7 years the value of your home should fall outside inheritance tax.

Plan for your Year-End

Sell your family home

Could you sell your home and gift monies to beneficiaries?

Alternatively, you could sell your home and give the money to your beneficiaries, or reduce the value of your home through a mortgage (often called Equity release), and give away the proceeds – the gift won’t be subject to Inheritance Tax provided you live for a further seven years.

Be careful, however, if you sell your home, give the money to your children and then move into their property – even if this is into a “granny annex” they’ve made for you with the money or a room in a house they have purchased – there could again be Income Tax implications if you don’t pay the market rent.

How is the property owned?

The normal rules for assets owned jointly with your spouse or civil partner will apply depending on whether you own your home as joint tenants (automatic passing by survivorship and full exemption), or as tenants in common where the individual portion of the property can pass on to your children when you die. A possible planning point is to divide your property between your spouse and grown-up children. In this way it reduces the future size of the taxable estate when your surviving spouse dies.

From 6 April 2017 HMRC has also introduced what is referred to as the Residence nil rate band and this means, as long as the estate is not worth more than £2m in total, that an individual will by 2020/21 have a nil rate band available on residences passed on to direct descendants of £500,000, with therefore £1m of property that can pass in this way on the second death.

As always of course with any Inheritance Tax planning a properly drafted will is vitally important and a review of this is usually a good first step for any planning exercise.

Posted in Blog, Property & construction