Inheritance tax (IHT) allowances
have failed to keep pace with house prices and many more people now have to
consider the IHT burden they leave to their beneficiaries. In the current tax
year 2017/18, your individual IHT allowance stands at £325,000 (£650,000 for
married couples and civil partners), with an additional “main residence
nil-rate band” of £100,000 per person that was introduced in 2017. This means
that parents or grandparents can leave a property worth up to £850,000 to their
direct descendants before IHT kicks in.
Despite the urban myths, the one thing you definitely cannot do is simply to sign your house over to your descendants whilst continuing to live in it. This is called a 'gift with reservation' and is ultimately inefficient for tax-planning purposes as the house will continue to form part of your estate. The only way to get around this is to pay the beneficiaries a market rent; however, this is unlikely to be a popular option for those who have paid off their mortgage in order to enjoy a comfortable retirement. Your beneficiaries will also have to pay income tax on the rental income; moreover, it leaves you vulnerable to the possibility that the house might have to be sold from under you if your beneficiaries find themselves in financial trouble.
So what options do you have? You could sell, move out and rent, or buy somewhere smaller and gift the balance of your gain to your beneficiaries. This is called a potentially-exempt transfer (PET) and becomes IHT-free as long as you survive seven years. If you have a big enough house, you could arrange joint ownership and live together in the house. That proportion of the house then becomes a PET and again, is IHT-free as long as you survive for seven years. For larger estates, there are more complex schemes to consider; however, these schemes need to be constructed with the help of a financial adviser to ensure not only that they meet the regulations, but also that an equitable deal is reached.
There are no easy ways to avoid IHT if a lot of your equity is tied up in your main house. However, you can at least maximise use of all the other allowances available to ensure that you manage the tax liabilities, whilst keeping a roof over your head.
Despite the urban myths, the one thing you definitely cannot do is simply to sign your house over to your descendants whilst continuing to live in it. This is called a 'gift with reservation' and is ultimately inefficient for tax-planning purposes as the house will continue to form part of your estate. The only way to get around this is to pay the beneficiaries a market rent; however, this is unlikely to be a popular option for those who have paid off their mortgage in order to enjoy a comfortable retirement. Your beneficiaries will also have to pay income tax on the rental income; moreover, it leaves you vulnerable to the possibility that the house might have to be sold from under you if your beneficiaries find themselves in financial trouble.
So what options do you have? You could sell, move out and rent, or buy somewhere smaller and gift the balance of your gain to your beneficiaries. This is called a potentially-exempt transfer (PET) and becomes IHT-free as long as you survive seven years. If you have a big enough house, you could arrange joint ownership and live together in the house. That proportion of the house then becomes a PET and again, is IHT-free as long as you survive for seven years. For larger estates, there are more complex schemes to consider; however, these schemes need to be constructed with the help of a financial adviser to ensure not only that they meet the regulations, but also that an equitable deal is reached.
There are no easy ways to avoid IHT if a lot of your equity is tied up in your main house. However, you can at least maximise use of all the other allowances available to ensure that you manage the tax liabilities, whilst keeping a roof over your head.
For
more information please do not hesitate to contact the team at Ward Williams
Financial Services Ltd on 01932 830664 or by email on wwfs@wardwilliams.co.uk.
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