Planning for the family home - introduction
It is generally accepted that the family home should form part of an inheritance tax (IHT) planning exercise only as a last resort and that, where possible, the planning should be directed towards other classes of asset.
That said, rising property prices and the fact that, for many people, their home is their most valuable asset means that often the family home cannot be ignored when looking to reduce the burden of IHT.
Planning opportunities are however limited and HMRC have taken steps to block schemes that have been popular in the past, including the:
- reversionary lease scheme (Buzzoni v HMRC held that the scheme avoids the gift with reservation of benefit (GWR) rules but there will be a pre-owned asset (POA) charge);
- lease carve-out scheme (Ingram v IRC);
- Eversden scheme (settlement on interest in possession and then discretionary trust), and
- double trust scheme (also known as the lifetime debt or IOU scheme).
As well as the steps taken by HMRC to limit the scope for IHT planning for the family home, other considerations to take into account include the interaction with other taxes, the financial and residential security of the homeowner and their future plans, including moving house or going into a care home.
The planning suggested uses only those methods recognised and understood to be acceptable by HMRC as inoffensive IHT planning.
Any IHT planning involving the family home depends on an individual's personal and family circumstances. They may wish to give away an interest in their home and then move out, continue to live in it or invite the donee(s) to live in it with them. Alternatively they may wish to realise some of the equity in the property, either by sale or through commercial equity release, so that they can rebalance their asset holding and consider making gifts.
If neither giving away an interest in the property nor realising part of the equity in it is considered desirable, drawing up a tax efficient will might provide a suitable option.
IHT treatment of the family home from April 2017 onwards
a. Additional nil-rate band for down-sizing
An additional nil-rate band of £100,000 was introduced for 2017/18 where an individual's main residence passes on death to a direct descendant. Any part of the nil-rate band unused on the first death will be able to be transferred to the surviving spouse or civil partner.
When an individual downsizes or ceases to own their residence on or after 8 July 2015 and leaves assets of an equivalent value to a direct descendant, the additional nil-rate band will also be available up to its maximum value.
There will be a tapered withdrawal of £1 for every £2 for estates with a net value of more than £2 million.
The change applies to deaths on or after 6 April 2017 and for downsizing moves or disposals on or after 8 July 2015.
The additional rate band has been set at:
- £125,000 in 2018 to 2019
- £150,000 in 2019 to 2020
- £175,000 in 2020 to 2021
b. Residential properties held through an off-shore vehicle
From April 2017 all UK residential properties held directly, or indirectly, through an off-shore vehicle, will be liable for IHT whether the property is occupied or let, and whatever its value. While the treatment of other assets held in an excluded property trust will remain unchanged, UK residential property held in such a trust will no longer escape an IHT charge.
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