Usually it is not possible to give away your home to avoid inheritance tax but to continue living in it. However, there are still exceptions to that general rule, even now. Many parents like the idea of giving away their home to avoid inheritance tax in theory – but are not so keen on the part where they have to move out! Generally speaking, if you give away your home to a child or a family trust, but continue to occupy it yourself, HMRC will not see this as a legitimate gift for inheritance tax purposes and the value of the house will be taxed as part of your estate on your death, so there will be no advantage to the arrangement. It can even increase your eventual tax bill.
There is a raft of anti-avoidance legislation on this subject – it was originally covered by the ‘Gifts with Reservation of Benefit’ rules introduced in Finance Act 1986, followed by the ‘Pre-Owned Assets Tax’ in 2005 to close the loopholes that lawyers had been exploiting meanwhile using complex double trust schemes. The good news is that there are a few loopholes which still ‘work’ and allow you to give away your home to avoid inheritance tax.
Pay a Market Rent
First, for those who are sufficiently wealthy, one option is to give away your house and then pay a full market rent to rent it back from the recipient. This arrangement tends to be unpalatable to the majority of clients in my experience, but for the odd person who can face the idea of paying their children a generous ‘rent’ for the privilege of continuing to live in their own house, it can be very effective; doubly so because the ongoing rental payments serve to reduce the donor’s estate for inheritance tax purposes, and to bolster the donee’s. It’s crucial that the rent is professionally reviewed every few years in order to be confident that this arrangement will hold water from HMRC’s perspective, when the time comes.
An Unforeseen Change of Circumstances?
A second interesting loophole which can be useful is an exemption in the ‘gifts with reservation of benefit’ rules which applies where someone has given away his or her house to a relative and ceased to occupy it. If the donor subsequently has an unforeseen change of circumstances and finds that he is no longer able to maintain himself through old age, infirmity or otherwise, he may move back into his former house, as long as doing so will constitute reasonable provision by the recipient for the donor’s care and maintenance.
Thirdly – and again this will not suit everybody – there is the possibility of multigenerational living. If adult children are still living at home with their parents or are prepared to move back in permanently, the parents can then legitimately give them a share of the house commensurate with the proportion of the house that they are occupying and continue to live there with them. In that scenario, the reservation of benefit rules will not apply. After 7 years, the gift will fall out of account in the usual way, and that share of the house will have passed into the children’s hands free of inheritance tax. In the meantime, it is important that the parents and children split all of the household bills fairly.
Chiltern Wills is a boutique Will-writing business based in Beaconsfield and run by former London solicitor Rebecca D’Arcy. Call us on 01494 708688 or email email@example.com for a free initial discussion about how we can help with your Will, Powers of Attorney or Probate services.