Inheritance Tax Planning for the Family Home 

Read our latest Q & A for Your Move property magazine, this time on an IHT saving idea involving the family home

Q: Between us my Wife and I own assets which are worth in excess of £2 million, with the biggest asset by far being  our house, which is valued at £1.5 million. We do not want to move or sell our home, but are concerned about Inheritance Tax – can we do anything?

A: If you and your wife have assets of £2 million, then your joint Inheritance Tax liability (usually arising on the second death) will be around £540,000, a sizeable sum. 

For many people like yourselves, the family home is the most valuable asset they have in their estate, and probably the most frequent question which those advising on Inheritance Tax (IHT) matters are asked is how IHT can be saved on the main residence.

There have been numerous ideas over the years which have been designed to provide a solution to this problem. In response, HMRC has introduced successive waves of legislation so that at present IHT planning opportunities are few and far between

Many people still believe that they can solve this problem by giving away (‘signing over’) their house to their children, but continuing to live there. This manoeuvre is not effective for IHT purposes as the transfer is classed as a ‘gift with reservation  of benefit’ i.e. although on paper the gift has been made the original owners continue to enjoy the benefit of using the house.  

In tax terms this means that irrespective of whose name may be on the title deeds, the gift fails. There is however a way around this issue, which can make sense in certain circumstances and that is for the parents to make a gift of the house, followed by the parents paying market rent to the children for their occupation of the house.

Clearly this would only make sense if the parents have a sufficient level of income at their disposal. The advantages of this in your case could be substantial. Inheritance Tax of £540,000 could be saved assuming that you and your wife survive 7 years from the date of the gift (and a life insurance policy can be arranged to cover this 7 year period of exposure). 

Payments of rent can further reduce any residual IHT liability and if the house grows in value going forwards then this  growth is outside of your estates for IHT purposes.

On the other hand there are some disadvantages which will mean that this would certainly not work for everyone. Many older people are asset rich/income poor in which case it would not make sense. Also your children would need

to pay income tax on the rental receipts which would need factoring into the calculations.

If you are concerned about IHT contact us for more information.