How to save Inheritance Tax on your main residence

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:

• The expectation is always that the parent giving the share will die before the recipient child, but if the child dies first, a GROB will arise at that point for the parent and IHT could be due on the child’s share – a double whammy! A combination of life cover and the child having an appropriate will might provide the solution.
• If the child already owns a property, will the child’s Capital Gains Tax principal residence relief be affected by the planning? Is there a need to elect which of the child’s residences is the child’s main residence? This needs to be done within two years of acquiring a new combination of more than one residence.
• If only one of several children can occupy the parental home, how will the other children be compensated if the child in occupation effectively receives an advancement of a share of their inheritance as a result of the gift?   This is assuming that the parents wish to treat their children equally of course. A discretionary trust of residue in the surviving parent’s will can help to ensure that equality is achieved in the end, assuming the other assets that the parents own are sufficiently valuable.
• Due to the third limb of this test, you need to be careful about which of the giver and the recipient pays for capital improvements to the property, as well as who pays for routine expenses. Ideally the giver should continue to pay all of these, otherwise careful records need to be kept.

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.