The Daily Telegraph - Saturday - Money
‘My wife and I live in separate properties – can two homes be inheritance tax-free?’
Three years ago my wife and I separated after many decades together. Neither party intends to get divorced. Initially I stayed alone in what had been the family house. She moved out and bought a small property for her solo life.
A couple of years later I sold the family house, distributed some of the proceeds to offspring and a further sum to my wife to allow her to buy a somewhat larger home. We both now live solo in separate properties both worth about £ 550,000. There are some other assets and savings, too.
We are both at an age where another seven years of life is uncertain. I understand that since our wills leave all assets to each other there would be no inheritance tax ( IHT) on the first death. In that event the survivor would sell the vacant property and distribute the proceeds and hope to live another seven years so that the offspring were not hit with a tax bill.
My query is whether on second death there is any IHT due on the two homes? Both are in solo names and solo occupied.
We have not gone down any legal separation route as we feel it an intrusive, unnecessary and costly path. It has recently occurred to me that any couple might pursue this “tax-saving on two houses” idea which HMRC is probably aware of. In our case this is a genuine and unfortunate split situation albeit without documentation. – Christopher
For capital gains tax (CGT) purposes it is separation that is relevant, not divorce.
Married couples (and civil partners) can transfer assets between each other free of CGT while together but this ceases three years after the end of the tax year of that separation. This was extended from one year in April. A married couple living together are only entitled to claim a single residence and qualify for relief from CGT for a main residence. Where you separated in conditions likely to be permanent, you are each entitled to claim so- called
“principal private residence relief ” on your homes. Rather confusingly IHT depends not on separation, but on divorce. Even though separated, while married you can transfer assets between each other without IHT issues.
When you sold your original house, it will have been your private residence up to then and no CGT will have been due. Likewise your current property should qualify for this exemption. Your wife should also qualify for the exemption on her own home if needed.
With reciprocal wills there should be no IHT on the first death. If your wife
dies first you will inherit her assets, including her home, rebased to market value for CGT purposes. You could then sell the assets, give the proceeds to your children, and start the clock under the “seven-year rule”.
On your death your executors will have your £ 325,000 IHT- free band available. Your estate should qualify for an added £175,000 “residence nil-rate band” sometimes called the family home allowance. This is because you will be leaving your assets directly to your children and these include your home worth over £175,000 and your assets are
Mike Warburton was previously a tax director with accountants Grant Thornton. Email your tax question to Mike to be answered in a future column. All letters are anonymised. Email questions to
taxhacks@telegraph.co.uk
below £2m. When you die your executors will also be able to claim for both your wife’s normal £ 325,000 allowance and her family home allowance. This is because in leaving all her assets to you she utilised neither of her allowances and also had a home worth over £175,000. Claims are subject to a twoyear time limit. Up to £1m should pass to your children free of IHT. The excess, plus the earlier gifts to your children, could be exposed to death duties if you were to die within the seven years from making the respective gifts.
You raise an interesting point about couples falsely claiming to have separated to gain two CGT exemptions for a property. There have been a number of court cases on this, usually involving rental properties. Your case is clearly genuine but you are right to be cautious.
There is no CGT at death in any event but if one of you sells their home and wants to claim the relief it would be wise to have supporting evidence available. For example, HMRC would expect each of you to be on the appropriate electoral roll, to be registered with your local medical practice and have all services registered separately.
It can also be helpful if you have someone of impeccable standing prepared to offer evidence, such as your local magistrate or solicitor, or perhaps you could invite the vicar round for tea.