IHT planning and the family home

What are the types of home planning currently available

Taxpayers with significant value tied up in their home but limited other resources can find they have a significant exposure to Inheritance Tax and so wish to ‘do something’ with their home.

This type of planning has been a minefield as over the years HMRC has produced technical obstacles to achieving the IHT savings involved in gifting part of the home. The types of home planning currently available encompass:

1. For parents with stay at home adult children – the parents may gift a share of the home to the resident adult child. They then all occupy the whole property as joint owners. The legal conditions will need to reflect the ownership as ‘tenants in common’ in specific shares and Land Registry updated. The adult child owner must continue to ‘occupy’ the home as their residence for the lifetime of the donor parents. This is then a gift of the property share which is potentially exempt from IHT and is exempt if the donors (the parents) survive 7 years from the date of gift. There are no ‘Gift with Reservation’ charges, or ‘Previously Owned Assets’ charges because of the exemptions: section 102B(4)(a) gives exemption from both GWR and POAT because both donor and donee continue to occupy the property.  If the child is likely to leave the property at some time in the future, then the parent will need to move to option 2 below to maintain that exemption.

2. Parents continue to occupy the whole house and pay full market rent – If the child is not occupying the property then the parents may gift a share of the home to any adult child as an outright gift. The parents must then pay full market rent every year to the adult child for their use of the property, or share of the property, given away. The adult child has to declare the rental income on their personal tax returns and pay income tax on that income.

3. Parents carve out a lease – if the property is divided into a long lease plus the freehold then these two assets can be dealt with differently. Parents would retain the leasehold with a fixed low rental and then sell the freehold to the adult child. There is no gift so the IHT charges do not apply provided full market value is paid for the encumbered freehold plus SDLT. A full professional valuation from a Chartered Surveyor is recommended to support the valuation used. Parents must not provide the funds to enable that child to make the purchase. However for an additional bite of IHT planning they may use the funds to set up a trust for the benefit of their grandchildren.

In all these cases Capital Gains Tax, Inheritance Tax and SDLT need to be fully considered and professional advice taken.

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