Advice on inheritance tax and the family home

Planning can help minimise inheritance tax on the family home.
Planning can help minimise inheritance tax on the family home.
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Robert Peel, tax expert, Garbutt and Eliott, www.garbutt-elliott.co.uk

Changes to Inheritance Tax legislation over the last few years have made planning a lot easier. We now have the main nil rate band and the new residential nil rate band, both of which are transferable to a surviving spouse.

The current level of the nil rate band is £325,000, which has not changed since 2009 and is not going to increase until 2021 at the earliest.

The rules surrounding the residential nil rate band are complex but it does mean that where couples have a combined estate of less than £2m and at least

£250,000 of this relates to the main residence, they may be entitled to an additional exemption of up to £125,000 each as long as all the qualifying

regulations are met.

This has meant that complex will structures involving the use of Will Trusts may no longer be appropriate for joint estates that fall below £900,000, being twice the level of both of the nil rate bands.

Simple wills that leave everything to the surviving spouse may be all that will be needed to avoid inheritance tax.

Complex wills, including Will Trusts, may be needed depending on individual circumstances but, generally, these will be for non-tax reasons to protect assets or to ensure that these end up in the right hands where modern family structures are complicated with second marriages and children from both marriages.

However, there are still large numbers of families who whose main asset is the family home and the value of their estates still exceed £900,000. These families are therefore facing a large inheritance tax bill. There are planning opportunities that are still available that they can take advantage of in order to reduce the impact of the tax for the next generation.

The first option to consider would be to sell the property and downsize thus releasing capital that can either be used to fund gifts to children now or to provide an income in an inheritance tax efficient manner.

If it is not desirable or possible to sell the house outright then there are commercially available equity release schemes that would provide capital to fund lifetime gifts by providing a lifetime mortgage. If owned by a couple, on the second death the house would then be sold and the proceeds used to repay the mortgage and accrued interest and any balance left over would be available to distribute to children. The outstanding debt would reduce the amount chargeable to inheritance tax. These are specialised financial arrangements and professional advice should be sought to ensure that it is suitable for you.

It is possible to gift your children a share of the house and the amount gifted would fall out of your estate for IHT purposes if you survive the gift for seven years. If your children still live with you, they would avoid the anti-avoidance legislation and you could carry on living in the house rent free. However, if they no longer live with you or they subsequently move out you would need to pay them a full market rent for the share gifted otherwise the gift will not be effective for IHT purposes.

You will need to be careful with the arrangements in order to avoid tax avoidance legislation. This involves reviewing the rent to ensure that it is at all times a full market rent.

Finally, if none of the above arrangements are suitable then consider life insurance cover. This will not reduce the amount of IHT payable but would

produce a lump sum on death to enable the IHT to be settled.