of benefit’: the parents retain the benefit of the asset even though they have technically given it away. The consequence can be a nasty IHT bill for their heirs.
COUNTER-PRODUCTIVE Such ill-planned gifts are counterproductive. As Rupert Wilkinson points out, “The last thing most parents want is to land their children with an unexpected and unaffordable IHT bill after they’ve gone. In many cases, the recipient of the gift will actually be forced to sell the property anyway, in order to pay the IHT.” However, if you do it properly, it is possible for a gift to be exempt from all IHT. Says Rupert: “Usually, property or other high-value gifts are exempt from IHT, as long as the individual doing the giving survives for seven years after making the gift, or pays for any benefit they receive from the property they give away – such as paying a proper market rent for the house they continue to live in. Nevertheless, gifts with reservation of benefit are still liable for inheritance tax, even if the donor survives for seven years, and will be taxed accordingly.” If you want to pass on some of your wealth to your children while you are still living and avoid all risk of retaining a benefit, in many cases the easiest solution is to sell the family home and downsize. Then, says Rupert Wilkinson, you can give the surplus cash as a lump sum to your children. If you live for another seven years, there will be zero IHT to pay on the gift.
KEEP THINGS SIMPLE As so often in life, it pays to keep things simple. Says Rupert: “Don’t fall for dinner party chatter about clever schemes that suggest you can give away the family home or valuable heirlooms with no financial consequences. The only sure way to avoid penalising your family with unnecessary taxes after your death is to plan early and take expert advice about how to pass on wealth to the next generation”. ■
IHT – THE BASICS What you need to know about passing on your wealth ● Inheritance tax is one of the big three direct taxes that affect individuals, along with income tax and capital gains tax. ● IHT is payable at a rate of 40% on the value of your estate above £325,000, or potentially £650,000 if you’re married or widowed before considering the additional nil rate band by reference to the property you occupy. ● Anything you leave to a spouse or civil partner is exempt, as are assets bequeathed to a charity. ● Your estate includes the value of your home (minus your mortgage), your savings and investments as well as possessions such as a car, jewellery or works of art.
CAUTIONARY TALES Some unintended consequences of giving away your home Mr and Mrs T give their £900,000 house to their children but stay living in it for another 15 years. It is a ‘gift with reservation of benefit’. After they have both died, the house is counted as part of their estate for inheritance tax purposes and their children face an unexpected IHT bill. Mr and Mrs Y give their £900,000 house to their children. They continue to live there but pay their children (as their landlords) a commercial market rent of £1,250 per month and have the paperwork to show HMRC. After the sale, Mr and Mrs Y live another 15 years, so no IHT on the house is payable on their death. But the older couple will have paid out £225,000 to their own children in rent, and this rent will be taxed as the children’s income. This scenario could also leave the children facing Capital Gains Tax when they sell the house, plus stamp duty to pay on the leaseback arrangement. Widowed Mrs B gives her £900,000 house to her son. She cannot afford to pay him rent. The child borrows against the house to fund a business venture. The business fails, the house is sold, and the elderly parent is left homeless.
TAX & TRUSTS We always aim to understand your personal circumstances and your objectives, and provide clear, pragmatic and commercial solutions. Much of our work still focuses heavily around using trusts legitimately to protect and devolve assets for individuals, families and
their asset-holding structures. This ranges from the drafting of wills and trusts to more complex tax advice for UK and international trustees. Our experience extends to advising individuals and trustees all over the world on the legal aspects of international wealth.
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