Make a plan to keep your house safe from the tax man

Yorkshire Post - Property - - PROPERTY - Robert Peel

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.

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