Beware the sharks when tax planning for your family home

Nigel Shaw, tax adviser, Garbutt and Elliott,

As the fear of Inheritance Tax (IHT)increasingly grips many families in the region, we are seeing regular attempts by less scrupulous advisors to prey on innocent home owners. They often target the elderly and vulnerable and their tax planning ideas are not worth the paper they are written on.

So, for the benefit of readers, I have detailed below some examples where caution is needed if you are to avoid an IHT disaster:

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*Always take a second opinion, preferably from a Chartered Tax Advisor or solicitor, when you are recommended to transfer your private residence “into a trust during your lifetime” – this area is fraught with danger and could leave you in a delicate legal position where you no longer legally own your home. Often the advisor is attempting to avoid issues like care fees or probate fees but all too often the tax consequences are overlooked and, as a result, you or your heirs could end up with unnecessary tax charges and penalties.

In a situation like this you must ask the advisor, “What are the Inheritance Tax, Capital Gains Tax and Stamp Duty Land Tax implications of giving up your legal ownership of the residence to Trustees?” If they cannot answer in full with detailed analysis do not proceeed any further.

*Another situation we have encountered is where a homeowner is encouraged to transfer not just their private residence but also other assets as well – for example bank accounts and share portfolios into trust. This is often done on the basis that it avoids future claims against your estate, especially if there are family issues or step-children involved and there are concerns over who will inherit.

Whilst in law this planning may well artificially reduce the assets in your estate, it could have wider tax implications depending on the terms of the Trust involved. It could also mean you miss out on the new valuable IHT reliefs shortly to be introduced by HMRC.

The other issue which you need to be alert too here concerns who becomes the legal owners of the private residence – they will be called “Trustees”. It is important your relationship with them is based on trust with a full understanding of your current and future financial situation.

*Finally, despite the announcement back in 2015 of the plans to introduce higher levels of IHT exemptions i.e. nil rate bands up to an additional £175,000 per homeowner, we are still seeing homeowners trying to circumvent these increased reliefs by unwittingly transferring their property interests in their lifetimes.

This, for many homeowners, does not make sense as we approach 5 April 2017 when the introduction of the “residence nil rate band” commences with a potential combined nil rate band of £500k by 2020-21. The introduction of residence nil rate band is tied in with the ownership of a private residence, which is held until death (albeit there are special provisions applicable in the event of downsizing during lifetime as distinct from lifetime transfers) so why would you contemplate missing out on this additional relief?

It may now be the case that homeowners who have transferred their private homes look to unravel these arrangements to make better use of the new IHT rules. This could prove complicated but it certainly merits further consideration.

I have advised on IHT Planning for over 30 years and only in very selective cases would you consider using the private residence as an asset suitable for lifetime planning. It’s often not feasible to undertake proper IHT planning without unforeseen issues.