Tax Questions – Sharing a Property to Reduce Inheritance Tax
To reduce a big inheritance tax bill say for example on your parent’s estate mainly consisting of a share of their home there are some steps you can take to soften the blow.
Basic IHT planning involves making gifts out of your estate and then surviving for at least 4 years, ideally 7 as then the gift escapes IHT altogether. This isn’t always easy to do in practice though if say a large part of the estate is tied up in an individual’s home. One option is to downsize to release cash to give away. However this isn’t always desirable especially if you want to keep property in the family. But there are some other ways, done with care to overcome potential anti-avoidance rules.
The ‘Gift with Reservation of Benefit’ (GROB) anti-avoidance rule means if you give an asset away but then continue to use or obtain benefit from it, it remains part of your estate for IHT purposes. Say your parents transfer ownership of their home to you but continued to live in it. Only when they ceased to live in the home would it count as a gift for IHT purposes.
The GROB rules don’t apply if the transferor pays the transferee rent at market rate for use of the asset they gave away. This works as an IHT saving mechanism also because the rent the transferor pays also reduces their estate without the 7 year wait.
The thing to be cautious of however is that rent is then taxable and an income for the receiver. If they pay basic tax at 20% or less then this gift type and rent agreement still saves tax overall, but is a lot less effective than a plan that avoids tax completely.
Another option might be for the owner to give away a share of the property and for the transferee to occupy it with them. Running costs must also be shared. This can save a lot of money and a full relocation is not necessary.
‘Relaxed Living Arrangements‘
The transferor and transferee don’t need to live on top of each other. There only needs to be some shared occupation. The home could be divided into different living areas so they could largely live apart.
For help calculating how to maximise on the reduction of IHT in your family, please contact our specialists at LHP. Let’s Talk.