Gifting the family home

For many people, the family home is now the most valuable asset they own, particularly in the South East. When combined with the value of other assets, this is pushing more and more people into the position where they are potentially exposed to a liability for inheritance tax on their deaths.

With a bit of careful planning, anyone finding themselves in that position can take steps to minimise the risk of their estate having to pay inheritance tax – but it does need careful and early planning!

The problem with property prices

Property prices have risen in recent years but the nil-rate band (the threshold before inheritance tax becomes due) has remained at largely the same level. More and more people are finding that their estates are now of a size where there will be a charge to inheritance tax on death.

The problem is compounded by most people not wanting to or not being able to give away the family home to their children. They also often need to keep hold of their liquid assets, usually cash or investments, to cater for future needs.

The Office for National Statistics has published figures showing that in 2014/15, £3.82bn of inheritance tax was paid. The figure for 2018/19 was £5.38bn – an increase of £1.56bn or 40% in just four years. This figure is likely to increase with the nil-rate band being frozen at £325,000 until April 2021, not to mention the fact that by April 2020 the residence nil-rate band will hit its peak.

Residence nil-rate band

The residence nil-rate band was introduced in April 2017. It has been phased in so that by April 2020 everyone will have a nil-rate band of £325,000 and a residence nil-rate band of £175,000 – a total of £500,000. It is also possible to transfer unused nil-rate bands between spouses/civil partners meaning that in April 2020, married couples and civil partners between them potentially have a total nil-rate band available of £1m.

However, it’s not as simple as that. There are restrictions (for example, the residence nil-rate band tapers away if the estate is worth more than £2m) and other conditions which, depending on individual circumstances, can limit the total nil-rate band available. It is also possible to claim the residence nil-rate band if an individual decides to sell their home and ‘downsize’; but this is governed by some complicated rules.

Inheritance tax

When a person gives away an asset, the general rule is that they must live for seven years from the date of the gift for the gift to be ‘forgotten about’ for inheritance tax purposes. Parents in particular are becoming a lot keener to try and minimise the inheritance tax bill on their death by giving away the family home to their children now, but want to carry on living in it.

For tax purposes this is very dangerous. There are very well established and quite complex, anti-avoidance provisions to stop individuals giving away an asset and still retaining a benefit from it (whether that is the family home or otherwise). Essentially, the rules result in the asset still being treated as being owned by the person making the gift on their death (even if they do not). With some careful planning, these provisions can be avoided.

How to gift the family home

One way is to make a gift of the whole of the family home and pay a market rent to the recipient of the gift for the benefit of continuing to live there. This is not without its own complications. The market rent will need to be properly determined (usually with the help of a surveyor or similar) and reviewed regularly. This is not to mention that the rent will be taxable income in the recipient’s hands. There is of course the need to consider the legal basis on which the individual continues to occupy the property – the person making the gift will, understandably, want to make sure that they will not be made homeless!

The alternative is to gift part of the property. However, this carries its own pitfalls which can easily undo any tax planning. It is very important that the two parties involved (for example, a parent and child) occupy the property together. This does not need to be on a full time basis, but there needs to be some joint use of the property.

It’s also important that the person gifting part of the property does not derive any benefit from the person they gave part of the property to. For example, if a couple gave half their property to their daughter, the daughter could not then pay for all of the utility bills or buy all of the food. And what constitutes ‘deriving a benefit’ is a complicated area itself. Whilst this method of planning can be very effective, it is also one that HMRC scrutinises quite heavily. It is imperative that anyone intending on passing on part of their property in this way obtains specialist advice before doing so.

Planning for your future

Although statistics show it is likely that the amount paid to HMRC in inheritance tax each year will rise, with some careful planning you can avoid this. The family home has quickly become the most valuable asset in many people’s estates, but also the one which is very difficult to incorporate into any estate planning without giving up complete control. However, it can still be done but how very much depends on individual circumstances.

For more information about gifting homes or inheritance tax, please contact: Bruce Clarke