Author: Helena Luckhurst
This article is taken from Helena Luckhurst’s blog The Wealth Lawyer UK
Successful Inheritance Tax (IHT) mitigation in respect of the main residence is one of the hardest things to do, as the law currently stands. However, as many people’s most valuable asset is their bricks and mortar, it is a problem that demands some consideration – even if the answer is to do nothing (yet) or take out life cover written in trust. But if neither of those appeals, what then?
Usually if you give away your home and continue to live in it without paying a rent, that gift is ineffective for IHT purposes, being a ‘gift with reservation of benefit’ (GROB). However, the GROB rules do not apply if: 1) you give away a share of your home; 2) you and the recipient of that share occupy the home; and 3) you do not receive any additional benefit from the recipient in connection with the gift of the share to them.
What it means to occupy a property is not defined in the IHT legislation. However, as long as the recipient has the control that comes with such a gift and there is some regularity of physical presence at the property, it is thought that that should do. So weekend visits from time to time where the recipient has their own bedroom, keeps their possessions there, has a key and can come and go at will should suffice. This sort of planning might work equally well if a child and his family can live in an annexe to the parents’ main house, or perhaps the parents’ property comprises the main residence and a converted barn, all on the same title. Occupation for these purposes does not mean 24/7 living under the same roof necessarily, which might make the arrangement more palatable for all concerned!
The theory sounds simple but this type of planning requires ongoing monitoring to ensure continued compliance with the conditions set by the legislation. If the conditions cease to be satisfied, the planning fails and a GROB will arise. Consider the following less obvious implications of this type of planning:
In these heady times where even routine tax planning is called into question by the UK press, making use of ‘statute blessed’ tax planning arrangements, such as this, is particularly attractive. However, there are non tax risks associated with giving away a share of your home. You need to have total confidence in your children and the strength of their marriages too.
Helena Luckhurst, Partner, Fladgate LLP (email@example.com)