Estate Planning / Inheritance Tax

Reducing Inheritance Tax – what to consider when it comes to your family home

For many, the family home is the most significant asset – both in terms of its financial value and because of the strong emotional ties it holds. This, together with a complex set of anti-avoidance tax rules, means it can be difficult to consider how to manage family property when it comes to Inheritance Tax (IHT).

When tax planning, the family home can be one of the most complicated assets to manage. But with a 15% rise in the amount of IHT revenues collected last year it’s vital to consider how to manage your estate, especially if your family home is worth more than the current IHT allowance.

Our recent webinar saw Peter Webb, Head of Tax Advisory, and Claire Spinks, Head of Tax Technical and Development, explore some of the opportunities to reduce Inheritance Tax.

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Reducing Inheritance Tax

The UK has a confiscatory tax system, and although only 1 in 20 estates currently fall into the IHT net, it’s inevitable this proportion will increase given that allowances have been frozen and property values continue to rise. If the IHT allowance had risen at the same amount as house prices it would have now topped £565,500; it’s currently sitting at £325,000.

So with that in mind it’s sensible to work out if you’re likely to face IHT sooner rather than later. Having a clear picture of what you might face gives you more time to plan ahead, and reduce that bill.

Many of our clients are keen to gift their family home to children. This can be effective but it’s important to tread carefully. A hefty Capital Gains Tax (CGT) bill could present itself, especially if your property has outbuildings or pastures, or you’ve been absent from your home for a period of time or used it for business. And when it comes to CGT the timescales are tight; you have 60 days to tell HMRC you’ve gifted your home, and to pay any CGT due.

Remember too that handing over your home represents an outright gift so you can’t retain any benefit. If you want to stay living there, you’ll have to pay market rent (which will then create income for your children and be taxed accordingly). Your children may also face added consequences – they won’t be able to claim first time buyer relief for stamp duty and might also incur additional home surcharges if they buy another house.

Gifting your home also means you no longer have any claim on it, for example if your child divorces the home may be one of the assets which is taken into account as part of the settlement.

Another option is to gift a share of the property and live in it with your child, although specific conditions need to be met. Gifting into trust is also a possibility, however, may trigger an IHT charge of 20%. Alternatively, you could downsize and gift excess proceeds. Don’t forget that any gift, whether property, cash or other assets, is subject to the seven-year rule – you must survive for seven years to avoid IHT completely.

Planning how to reduce Inheritance Tax when it comes to the family home can be complex. We can help. To discuss any aspect of your estate planning, please get in touch with your nearest office.