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Published On: December 12, 2023 | Blog | 0 comments

Inheritance Tax Planning and the Family Home

HMRC data revealed that in the 2020/2021 financial year, estates in London raised £1.34 billion in Inheritance Tax; 28% of the Inheritance Tax paid across England. This was an increase on the £1.26 billion raise in the previous financial year. Due to an increase in the average size of an individual’s estate, together with frozen Inheritance Tax allowances, more estates in London will be required to pay Inheritance Tax.

Understandably, individuals wish to consider options to mitigate their Inheritance Tax liability and often seek advice on gifting their most valued asset, their family home.

 

Gift with a Reservation of Benefit

Legislation provides that for a gift to be valid for Inheritance Tax purposes, the person making the gift, known as the donor, must survive the gift by seven years.  This gift must be unconditional – that is with no strings attached to it. This means that if you were to gift your main residence to another individual, you cannot reserve any benefit from it.

This is called a ‘Gift with a Reservation of Benefit’, and HMRC will determine that because the donor is still benefitting from the gift, it is not an effective gift for the purposes of Inheritance Tax. The consequence of this is that on the death of the donor, HMRC will view the main residence as still belonging to the donor’s estate, despite it being legally held by another individual.

There is a potential solution which may assist some individuals. An Inheritance Tax relief is available which allows a donor to gift a share in their main residence to a co-occupier. The key requirement is that the donor does not retain a benefit from the share in the property that they have gifted.

Critically, to succeed in tax planning, the following two conditions must be met throughout all of the period of seven years ending with the donor’s death, in addition to the standard requirement to survive the gift for seven years:

  1. The donor and the recipient of the gift of the share in the property must both occupy the property; and
  2. The donor does not receive any benefit, other than a negligible one. Put broadly, each occupier must equally share the expenses of the houses (bills, maintenance, repairs etc.).

If both are these conditions are met until the donor’s death, then HMRC will view this as a valid gift for Inheritance Tax purposes, and the Gift with a Reservation of Benefit rules above will not apply.

Naturally, careful consideration must be made when gifting property to mitigate Inheritance Tax, as this is arguably an individual’s most important asset.

If you would like to discuss gifting property further, or Inheritance Tax planning in general, please do not hesitate to contact our dedicated private client team who can provide tailored advice depending on your estate and circumstances.

* Disclaimer: The information on the Anthony Gold website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*

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