The UK currently has over 11 million people aged 65 and over, and nearly 80% own their own home. Many of these individuals are likely thinking about passing on their wealth to their families in the most tax-efficient manner. There are a number of myths about inheritance tax (IHT) and the supposed best methods for minimising your tax exposure. One that frequently arises is giving away your family home; so below, we have laid out the consequences of frequently suggested moves and provided some alternative solutions.
Giving away your family home is not always a good idea; here’s why.
According to the ‘reservation of benefit’ rulings, if you continue to live in a property you have given away, the property will still be subject to inheritance tax at 40% on your death, after allowances. In order to avoid the reservation of benefit, full market rent would need to be paid for living in the property, and if the rent value fell below market value, the rules of reservation of benefit would apply again. Before choosing this option, one should consider that the rental income will actually need to be paid.
Should you decide to give the property to an individual, there will be no IHT to pay if you survive the next seven years. However, if the property is transferred to a trust, you will be liable to an immediate IHT bill of 20% of the property’s value in excess of the standard allowance (assuming it is available). There will also be ongoing IHT charges every ten years calculated at up to 6% of the trust fund’s value. If the property is then distributed to beneficiaries, there will be an additional charge of IHT of up to 6% on the amount distributed.
On the sale or disposal of the property to an individual who doesn’t live there, the Principal Private Residence Relief will be lost, which will result in a Capital Gains Tax (CGT) liability on later sale. If the property is gifted into a trust of which you are a beneficiary, the Principal Private Residence Relief will prevent any capital gains tax liabilities if you live in the property, although the ‘reservation of benefit’ will still then apply.
If the property remains held in your name, your estate will not have any capital gains tax liability on any gains before your death and there is a tax-free uplift in value for your beneficiaries. However, should you transfer the property to an individual or to a trust during your life, this benefit will no longer apply. Instead, capital gains tax will be due on any future sale according to the increase in value following the date of the gift.
It is unadvisable to gift a property in order to remove it from care cost calculations. According to ‘deliberate deprivation’ rules, the gifted amount will be treated as ‘notional capital’. The amount will still be taken into account when calculating liabilities.
What are the suggested alternatives?
1) Down size and gift your proceeds
An easy solution for minimising tax exposure would be to sell the family home and downsize, then gift the net sale proceeds. If you ensure the property is held in your name and you live in it, you will avoid capital gains tax liabilities. There will then be no inheritance tax to pay for gifting the proceeds if you survive seven years after making the gift.
2) Borrow on security and give away the resulting funds
Another option would be to reduce the value of your property by borrowing against it. The borrowing would both be deductible from the value of your property and generate excess cash. The additional cash generated could then be gifted, free from IHT if you survive seven years. However, it is important to ensure the interest payable on the borrowing does not exceed the IHT saving.
3) Give a share of the house to a family member who lives with you
You might want to gift the property into joint names with an adult child who shares the property with you. This could bring your property value under your nil rate bands of presently £325,000 per person, plus the new main home allowance and possible further allowances not used by a pre-deceased spouse. The reservation of benefit will apply at a later date, however, should they move out of the property.
It is important for Myers Clark to stress that each individual’s situation is different, and if you are looking to move or gift assets, you should consult a professional tax advisor for tailored advice.
For more information about how this might benefit you and your family, please contact Rebecca Potton, rebecca.potton@myersclark.co.uk.