Most of us are looking for ways to avoid inheritance tax taking a huge chunk out of the estate we’re passing on to the next generation. What once applied to a fraction of estates now impacts many, many families every year thanks to a threshold that has not been updated in more than a decade. With inflation rising, the necessity to make your estate as tax efficient as possible has never been stronger.
Along with the money in your accounts, one of the most significant considerations in most people’s estates will be property. With the average home in the UK currently valued at £290,000 – but significantly higher in some parts of the country – looking for ways to reduce the financial burden for people who are likely dependent on their inheritance is one of the most helpful things you can do.
But there are plenty of pitfalls to avoid – pitfalls that may seem like simple solutions but that quietly undermine your ability to strengthen your loved ones’ financial circumstances.
Can You Sign a Property Over to Someone Else Without Exchanging Money?
Yes, it is possible to gift a property to someone without any money exchanging hands, but it is rarely the best thing to do if you’re looking to reduce inheritance tax. Giving gifts of money and assets to family members can be an effective way to ensure they benefit from a little extra free from the burden of IHT – and a certain amount is permitted each tax year without any risk of incurring tax after your death – but this tends to apply only to gifts of much lower value than property.
Gifts that do not fall under the annual exemption criteria (which includes property) are subject to the seven-year rule. If the gift-giver passes away within seven years of giving the gift, then it will be liable to incur inheritance tax for the receiver, even if it’s been years since they received it.
But, in most cases, signing over a property will not be considered a straightforward gift. If you continue to live in the property after gifting it, then this is legally known as a gift with the reservation of benefit. This is a common mistake, and goes to show just how important solid financial advice is as you’re beginning to look at minimising the inheritance tax your loved ones have to pay.
Gifts with Reservation of Benefit
This type of gift was introduced as a way of cutting down on the evasive tactics homeowners might use to make their property exempt from inheritance tax. While it can refer to any gift that the giver continues to benefit from after the fact, the most common (and obvious) gift to fall under this category is the family home.
Gifts with reservations of benefit will not fall under the 7-year rule. The reservation of benefit means that it remains a part of your estate and will be considered as one part of the whole no matter how long ownership has been held by your loved one.
What if You Pay Rent?
Paying rent to the new owner of the property can be an effective way to remove the ‘reservation of benefit’ from the gift, but there’s a catch: any rent you pay must be in line with market values for rent and not a nominal sum designed to meet the criteria without incurring a high, regular expense for the gift-giver.
If an appropriate rent is paid (and documented) for the rest of the gift giver’s life, then it may be considered a lifetime gift. You’ll want to talk through the specifics of your case with a financial advisor to avoid any unwanted revelations down the road – and keep in mind that the seven-year rule will still apply – but, in some cases, this approach is effective.
Of course, factoring rent into a retirement and pension plan isn’t always possible, particularly if you’ve paid off your mortgage and didn’t make rent a part of your plan prior to retirement. This is why it’s best to start thinking about your inheritance tax planning as soon as possible.
What if you move out?
Moving out of the property would mean that you are no longer significantly benefitting from the gift. If the receiver moves into the property, then you will need to spend less than one month of the year with them; if you stay in the property without the receiver, then this period will need to be no longer than two weeks each year.
Of course, moving out likely means paying rent on a different property, along with moving expenses.
What about putting the property into a trust?
This is another question with no simple answer. In some cases, yes, but it really depends on your approach: the type of trust you use, retained interest, reservation of benefit, and how the rules and regulations evolve over the years.
This is something you definitely want to discuss with an expert, as any mistakes can prove costly (in terms of effort and money) to you and your loved ones. Don’t build homes on sand, and don’t build IHT plans around assumptions.
Please note: Inheritance tax planning, will writing, estate planning and trusts are not regulated by the FCA