Mitigating IHT on the family home

The problem

If an individual gives away their home but continues to occupy it until they die, the gift with reservation (GWR) rules apply and the gift remains part of their estate for IHT purposes.  The GWR rules apply unless they are excluded from benefitting from the asset. 

The solutions

Full Consideration paid

The GWR rules will not apply if the donor pays ‘full consideration’ i.e. a market rent for living in their home.  However, this means the rent is taxable in the hands of the donee.  The advantages of this arrangement are:

  • A one-off lump sum could be paid instead of regular payments.  This means the donor’s taxable estate is reduced as the payment is not a gift.  Also the premium will partly be taxed as capital which is taxed at lower rates than income and the donee has their capital gains annual exemption available.
  • The legislation does not specify  that a formal rental agreement must be in place, therefore the premium  could be paid in money’s worth for example capital expenditure or repairs to the property.
  • The money could be paid to a basic  rate taxpayer or even a non-taxpayer.  Alternatively, a trust structure could be used to appoint income to minor grandchildren.
  • Also any appreciation in the value of the property falls outside the IHT estate.

Property Share

If another individual shares the donor’s residence, it is possible to gift a share of the residence to that person.  The GWR rules would not apply provided the property is also the donee’s home.

Sale to spouse

It is still theoretically possible for one spouse to sell their share of the property to the other in exchange for an IOU.  This debt is then gifted to the children as a PET.  After seven years, the value of their share of the house is out of the individual’s estate for IHT.  This arrangement is possible as a sale for full market value is not a gift and it also involves a transfer to the spouse which is exempt.  However this method may involve an SDLT charge depending on the value of the property.  This is an aggressive strategy that is highly likely to be challenged by HMRC from a number of technical angles and is only appropriate for the client who is willing to take a punt!

 

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