Can I give my house to my children to minimise inheritance tax?
You would need to pay rent to your new landlord – your son or daughter. You also need to think through the implications of the “seven year rule.”
Inheritance tax (IHT) brings together two of life’s only certainties – death and taxes. Both are sadly unavoidable. However, effective planning can certainly help minimise your IHT liability, as we explore here.
One commonly-asked question is whether you can give your home to your children (or grandchildren) as part of an estate planning strategy. Very often, a home will be a family’s most valuable asset and shielding it from IHT appears an attractive option. In theory, giving your home away could allow you to achieve this. However, there are complications involved that mean it is rarely a straightforward option.
Firstly, you face a difficult choice: either stop living in the house or pay rent to your child or grandchild. Both options come with emotional and financial implications. To satisfy HRMC that the property really has been given away, rent has to be paid at the market rate – and not a preferential “family rate.” This could put unwelcome strain on your cash flow and potentially complicate relationships.
Importantly, you also have to bear in mind that the “gift” of your house would be subject to the “seven-year rule,” which we explain in more detail below.
You also need to make sure you have properly assessed the benefit of giving your home away. The IHT rules make some additional provisions for those who want to pass on their main home to their children in the form of the "residence nil-rate band." This boosts your normal tax-free IHT allowance (£325,000) by £175,000 to £500,000. This allowance is gradually withdrawn for those whose assets exceed £2m, but there are planning options available that could help you recover it.
In addition, there are special provisions for those who may need to move into a care home or assisted living. The rules are complex, but they may mean you can live in your own home for longer while still benefiting from a reduced rate of IHT when you die. Please do speak to your lawyer or tax adviser to find out more.
What is the seven-year IHT rule?
The basic principle is that if you give away assets and survive for seven years, those assets are removed from your “estate” and there is no IHT to pay on them.
If you die within the seven-year period, however, the assets may be considered as part of your estate – and be subject to IHT. This will depend on the size of the gift. If it is less than the IHT-free allowance, it will use this allowance up – but not be subject to IHT. If it is larger, the excess could be subject to tax. There are some important considerations to bear in mind.
First, you cannot continue to benefit from the assets, which the taxman would regard as having your cake and eating it. This does not just apply to your main home. If, say, you give away your holiday home but continue to take holidays in it, you must pay commercial rent to the new owner.
Second, the rate of inheritance tax does not fall from 40% to zero in one go on the seventh anniversary of the gift. If you have given away more than £325,000, the tax rate that would apply if you die falls on a sliding scale to 32% after the first three years, then 24%, 16%, and in the final year, eight per cent.
Third, there may be consequences for non-UK resident recipients of gifts in their local jurisdiction. This is something to bear in mind if your children or grandchildren live or work overseas. Gifts to a non-UK domiciled spouse could also fall under the seven-year rule. There is a lifetime spousal exemption for gifts to a non-UK domiciled spouse of £325,000. The normal gifting rules would then apply. So you could give a further £325,000 to a non-UK domiciled spouse every seven years - but amounts in excess of that would be subject to IHT if you die within seven years.
What is “deathbed gifting”?
Those whose assets exceed £2m have the residence nil-rate band (see above) gradually withdrawn until it is reduced to zero for estates worth more than £2.35m. However, they could get this exemption back if they gave away enough assets while still alive - ideally in a planned way, but if necessary even on their deathbed.
You would need to bring your assets down to £2m to get the entire tax break back, because of the way it is withdrawn on a sliding scale. Although last-minute gifts of this kind would not escape inheritance tax, they would not be counted as part of the estate for the purposes of calculating the residence nil-rate band.
This means that the allowance could potentially be restored, allowing you to reduce your IHT bill by up to £70,000 (40% of £175,000).
The importance of advice
IHT is a hugely complex area and it is a good idea to get specialist advice from a financial adviser. IHT planning can take time to become effective and you may want to consider insurance to complement your approach. Policies can be tailored to meet your IHT tax bill, either on death or until the expiry of seven years after a gift. If the policy is "written in trust" the proceeds will be outside your estate.
Whatever estate planning methods you use, be sure to keep thorough records and pass them on to your executors. If you have significant wealth, you are likely to need advice from a lawyer and potentially tax advisers as well as financial advisers. Your will should also be drawn up to complement your IHT planning and kept up to date.
To find out more, please do get in touch email@example.com.
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