Land and buildings will, for most people, be the most valuable asset they own. In many cases it will also be the main reason for a charge to Inheritance Tax (IHT) arising.
The simplest means of avoiding IHT is of course to ensure the property is not in your estate at your death by giving it away more than seven years before. This causes considerable difficulty where the property is your main home and you wish to continue living in it. This is because of the “Gifts with Reservation of Benefit” rules contained in the Inheritance Taxes Acts 1984 (IHTA’84). These rules state that anyone who gives away property and continues to live there rent free will not have disposed of the property for IHT purposes and it remains in their estate.
There are a number of different ways to mitigate IHT in such circumstances;
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Shared Home Arrangements: - A percentage of the equity is given to a child or near relative who takes up occupation. Theoretically the percentage could be as much as 99% but this would be seen a overly aggressive by HM Revenue & Customs (HMRC). More often no more than 50% need be gifted. Both occupants should then take care how the household bills are paid to ensure the gift is effective.
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Disposal at full market value: - The full market value is paid for the property perhaps using a loan. The proceeds of sale can then be gifted as potentially exempt transfers although not to the purchaser. The downside here is that Stamp Duty Land Tax may be payable and the Capital Gains Tax (CGT) main residence exemption is lost.
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Cash gifts: - A gives cash to B and B purchases a property, which is then occupied by A. The Gifts with Reservation provisions have no tracing rules to include the property within the estate of A, however to avoid the pre owned assets charge the gift is best given and then 7 years allowed to elapse before purchase.
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Trusts: - There are several ways of using a trust to shelter any property from IHT, not just the main home. Be aware that property gifted with value in excess of the nil rate band, will incur IHT at the lifetime rate of 20%. In such circumstances the use of pilot trusts can be very helpful whereby several different trusts are set up with each given a proportion of the property to remain within the nil rate band. The trusts should not be set up on the same day.
For further information please contact Roger Harding or Tim O’Keefe.
Date:21 April 2009
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