Make a plan to keep your house safe from the tax man
RECENT changes to Inheritance Tax legislation have made planning simpler, in that the nil rate band, currently £325,000, can now be transferred from one spouse to another if this was not fully used when the first spouse died.
This has meant that complex will structures involving the use of trusts and debt/IOU arrangements are no longer appropriate for joint estates that fall below £650,000. Simple wills that leave everything to the surviving spouse are all that are needed to avoid IHT. Previously this would have meant a tax bill of £130,000.
Although this change is welcome and simplifies matters for a large number of families, there are those whose family home is worth more than £650,000 and who are therefore facing a large inheritance tax bill when they die. If you are in this category of property owners, there are counter measures. The first option would be to sell the property and downsize, thereby releasing capital that can either be used to fund gifts to children now or to invest in assets that are exempt for IHT purposes, such as business or agricultural property or shares quoted on the Alternative Investment Market.
A gift to your children would be exempt if you survive the gift by seven years. A re-investment into exempt assets would fall out of your estate after only two years.
If you do not wish to sell your house outright then there are commercially-available equity release schemes that would provide capital to fund lifetime gifts or re-investment by providing a lifetime mortgage. On the second death the house would then be sold, the proceeds used to repay the outstanding mortgage and interest and any balance left over would be available to distribute to your children. The outstanding debt would reduce the amount chargeable to IHT.
If your children still live with you it is possible to gift them a share of the house and the amount gifted would fall out of your estate for IHT purposes if the beneficiary survives the gift by seven years. You would need to be careful with this type of arrangement as your children would have to occupy the house with you and pay no more than their fair share of the running expenses. If they moved out in the future you would be faced with the prospect of having to pay them a full market rent for their share in order to avoid strict tax anti-avoidance legislation.
You could also consider what is known as a full consideration lease scheme which involves you gifting the property to your children, whether they lived with you or not, and then paying them a full market rent in order to continue occupying it.
You could also consider a sale and loan arrangement with your spouse. This involves one spouse selling their half share to their partner for full market value but leaving the proceeds outstanding as a loan. The benefit of the loan is then gifted to the children removing that amount of value from your estate after seven years.
Although the house is still owned by one spouse it is then subject to a mortgage in favour of the children and both parties are able to carry on living in the house rent free and avoid the anti-avoidance legislation. Finally, if none of the above arrangements are suitable then consider IHT life insurance cover.
This will not reduce the amount of tax payable but would produce a lump sum on death to enable the IHT to be settled and may avoid a forced and rushed sale of the property. Bear in mind that the Revenue will look closely at valuations to ensure that they are full market value.
There are strict anti-avoidance rules to prevent you trying to make gifts that are effective for IHT purposes but still enable you to carry on enjoying the property gifted and you should take professional advice if you are considering any of the above arrangements.