Many people would love to give away the capital value of their home in order to save on Inheritance Tax (IHT) whilst continuing to live there. One of the first rules you learn in Inheritance Tax planning is that you cannot achieve this. This article focuses on the limited circumstances when this is in fact possible.
It may be surprising to find that the tax statutes provide an exception to this rule. This is no loophole or oversight – it was introduced in the 1999 Finance Act to put a previous concession on a statutory footing following the case of Lady Ingram. Further, when the Pre-Owned Asset Tax was introduced in 2004 it included a specific exclusion to prevent a charge arising there.
The exclusion applies to certain property assets and essentially this is in either of two basic scenarios, and it is the first of these that we are focussing on here.
- The multi-generational home
Where the parents own the family home and their adult children also occupy it with them, then it is possible for the parents to give an undivided share in the home to their children provided that the parents continue to pay at least their fair share of the bills. To be cautious, and as a further piece of IHT planning, the parents usually continue to pay all the bills.
Should the children move out of the property at any time during the parents’ lifetime then the reservation of benefit rules would kick back in and the full value of the house comes back into the parents’ estates for IHT.
- Let property, either commercial or residential
The basic principle here is that you would give away an undivided share of your interest in one or more let properties and retain the right to up to 100% of the income.
It might be easier to understand why HMRC are happy to let this rather generous rule continue to survive – surely its use is widespread and therefore costing them a considerable amount of tax?
The answer lies in the practical limitations that surround the implementation of the planning, and in particular:
- The share being given away is put into a formal trust. This means that it will be subject to an immediate charge to IHT (at the lifetime rate of 20%) to the extent that the value exceeds the available ‘nil rate band’ of the donor. This is currently £325,000 per person, less any other immediately chargeable gifts in the last 7 years. In some cases the property may attract a degree of Business Property Relief that could help here. Nonetheless in practice the gifts are usually limited by this.
- A gift within the nil rate band will not save any IHT until the client has survived the full 7 years, after which point the nil rate band is free to set against other assets or later gifts. Having said that, any further growth in the value of the share gifted will be outside of the donor’s IHT net with immediate effect. Even if there is no growth, the client is in no worse position on a death within 7 years than if they had not done the planning, apart from professional fees.
- The tax code requires only that an undivided share is gifted. ‘Share’ means less than 100%. HMRC equivocate on this point and suggest that they may challenge cases where more than 50% is gifted, although their reasoning for why they believe this or what the arguments would be is withheld from the published version of the manuals.
Given the points above we can see that the ideal scenario for using this planning is where:
- The family lives in a valuable multi-generational home and plans to do so indefinitely.
- The property is worth around £650,000 or more (or £1.3m for jointly owned property).
- The donor fully expects to survive a further 7 years.