Inheritance Tax and your Family Home

Family home inheritance tax

Talk to the average accountant in the street, and you’ll get a version of ‘there’s not much Inheritance Tax planning that can be done re your family home’. Well, ‘Au contraire, Blackadder’, you have options, and they’re all legal

That said, if you’re married, or in a civil partnership, and your home is worth £1m, or less, and you’re planning to leave it to your own kids, then go have a lay down and watch some Netflix, coz there’s nothing you need to do – at least not with that part of your overall estate!

If you don’t fit that mould, and not so many do anymore, then this blog’s for you. So, grab a coffee, adjust anything that’s tight, or itchy, and let’s take a look at how best to exercise your duty of care, for your family..

The tax position

There are many pages of legislation relating to Inheritance Tax in general, and to the family home in particular. It’s the one asset class that applies to most people, and the one where there’s been plenty of ‘avoidance schemes’ in the past

Be in no doubt, His Majesty’s Revenue & Customs (HMRC) has wide powers and a great deal of targeted anti-avoidance legislation at its disposal and, quite properly, uses all of them to the fullest extent. In particular, beware “Gifts with Reservation’. More on that later

To plan properly, you need professional input, because UK Inheritance Tax legislation is complex, and complicated, and rarely ‘does what it says on the tin’, to borrow from RonSeal (the preservative manufacturer, not the one at Dudley Zoo!)

Take action, start now

Take action now to protect your family home

You must take action, as the default position likely will cost your family serious tax

When your beneficiaries are crossing Claymores with HMRC, trying their best to sort Probate on your estate, and just a few weeks after you died, it’ll be because you couldn’t be arsed to sort things for them!

Facts don’t cease to exist just because you ignore them so, get your Will done, professionally, and then sort your Inheritance Tax planning for your family home and your other assets

Remember – the cost of ‘doing nothing’ is far less than the cost of ‘doing something’, and you really do need professional advice

Here’s some of HMRC’s rules re Inheritance Tax and the family home:

Exemptions totalling £1m are available so, in theory, that should mean that most UK family homes are outwith the scope of Inheritance Tax. Here’s those Exemptions:

Nil Rate Band £325,000
Transferable Nil Rate Band £325,000
Residence Nil Rate Band £175,000
Transferable Residence Nil Rate Band £175,000
Total exemption £1,000,000

If you’re a married couple, or a widow, or widower, your family home is not worth more than £1m, and you want to leave it to your children, that works, so you can focus on Inheritance Tax planning for your other assets, if appropriate

Unless, of course, your total assets are worth more than £2m, when you will lose some, or all, of the Residence Nil Rate Band, due to ‘Tapering Provisions’

Here’s a few more examples of when you may not qualify

  • If you give your home away (no, don’t titter, some people do that!) then your family may not benefit from Residence Nil Rate Band
  • If your family home is worth more than £1m
  • If you’re a single, divorced, or unmarried person
  • If you’re leaving your family home to someone who is not a direct descendent

Wealth warning

Before we get started on legal Inheritance Tax planning options, there needs to be a wealth warning: if you make a gift of your family home, and then retain any form of benefit, it will fall foul of ‘Gift with Reservation’ rules, and the planning will fail for Inheritance Tax purposes. Which means that your family will still have to pay the Inheritance Tax. So make sure you take proper professional advice..

(‘Pick me, pick me..’ Donkey, from Shrek!)

What are the Inheritance Tax planning options for the family home?

Downsizing is an option. The simplest version is to sell your family home, move into a smaller one, and give away some or all of the surplus. The gift is a ‘Potentially Exempt Transfer’ (PET) which means that, providing you survive for 7 years, your gift is outside of your estate for Inheritance Tax purposes

Another option is to sell your family home, move into rented accommodation, and give away some or all of the sale proceeds. That’s a PET, and not one for the risk-averse!

If you want to stay in your family home, you could consider re-mortgaging the property, perhaps by some form of ‘Equity Release’ arrangement. In some circumstances, mortgage payments are fixed for the remainder of life, with interest rolled-up until you die, and then  repaid from sale proceeds. Remember to give away all, or at least some, of the funds released (that’s a PET) or you won’t have achieved anything in terms of Inheritance Tax planning

You could invest some of your surplus in Alternative Investment Market (AIM) shares. AIM investments are outside your estate in 2 years, but beware the additional risks involved

If you want to gift some of your surplus, but still retain the income, it might be appropriate to consider a ‘Discounted Gift Trust’ or a ‘Loan Trust’ scheme. Make sure you find a financial middleman who will put your interests ahead of their own..

One further option is to contribute some of the surplus to a properly constructed and operated Qualifying Non-UK Pension Scheme (QNUPS). Advantages are that the asset should be immediately outside of your estate for Inheritance Tax, and you can have a wide portfolio of low risk investments, if that’s your preference

More Inheritance Tax planning options for your home

You could consider selling your family home to your beneficiaries (likely your children) at full market value. There will be Stamp Duty Land Tax (SDLT) to pay but, that way, your home should be immediately outside of your Inheritance Taxable estate. You’ve still got to deal with the sale proceeds, of course. You could view this as a form of downsizing, as one option is to buy a smaller house, and gift some or all of the surplus. As before, the gift will be a PET

If you’re married, you might consider leaving a share of your home to your children in your Will. When Mum or Dad dies, the children will own it jointly with the surviving spouse. Be aware that if you own the property as ‘Tenants in Common’ then it doesn’t necessarily have to be equal shares. Just saying..

If you don’t like any of those ideas, then try this one. You could gift your home to your children, and still live in it, without impacting the Gift with Reservation rules, by paying them a full market rent

You must make sure that there’s a full and proper rental agreement, and that it’s legally enforceable. Have a proper lease drawn up, and make sure there are regular reviews, which are in line with normal commercial practice

Two downsides to this are, your children will be subject to Income Tax on the rent they receive, and there will be Capital Gains Tax (CGT) on future growth in the value of the property

Déjà vu, all over again

Types of trusts for your family home

OK, time for a gentle reminder

This blog is designed to highlight some ways in which you can legally (re)arrange your financial affairs, to aim to mitigate the impact of Inheritance Tax on your family home, which must be paid by your family and loved ones

Remember, just because your Accountant isn’t switched on enough to be aware of the subject matter, doesn’t, in any way, compromise the legitimacy and effectiveness of the planning

So, as Ben Elton’s ‘Will Shakespeare’ says ‘bring ale, bring pie, and let all rejoice’ – we’ve saved the best idea ‘til last!

Clever Inheritance Tax planning and the family home

Warning; this next suggestion may be a complete no-brainer for anyone lucky enough, and wealthy enough, to take advantage..

If you own more than one property, consider moving out of your family home, and moving into one of your smaller properties. Then, gift your property to your children. It’s a PET, so you need to survive the gift by 7 years

The icing on the gateaux is that, if you make the gift within 9 months of selling, it should be free of Capital Gains Tax (CGT), under Private Residence Relief

You’re welcome..

Faith, hope, and clarity

As you’ve stuck with this to the bitter end, it might be fair to assume that most of it is new to you

Extrapolating that thought process, it’s likely also true that your existing advisor didn’t know either, or they would have told you

We met recently with a client’s accountant who demonstrated a vast knowledge about knots, penguins and cheeses, but less so when it came to technical tax planning

With Inheritance Tax planning it doesn’t matter how you got to where you are, the important thing for you and your family, is that you get it fixed

Reality check: you can’t do that yourself, but our team of Chartered Tax Advisors can, and they’d like to work with you..

Their job is not to find fault or criticise, it is to put you and your family in the best Inheritance Tax place you can be, in line with you assets, aspirations and goals

If you’re ready to fulfil your duty of care, for your family, then let’s talk for FREE for an hour HERE

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