How can property help with inheritance tax planning?

What can you do with your property to help with inheritance tax planning?

In Ola’s article, A Focus on the Family Home as a Tool for Inheritance Tax Planning, she discussed the common pitfalls of trying to use the family home in inheritance tax and estate planning.

In the second of her two-part article series, Ola Szymaniec, a Solicitor in our Private Client team, will show how, with robust legal advice, you may be able to use the family home in estate planning.

Starting position

Whenever we see clients, before we can start to apply our legal knowledge, it is imperative that we are aware of the unique background factors relevant to our clients.

Often, we have clients who want to make, what they think, is a quick or small change to their will or to their estate. However, given a particular set of circumstances, those small changes may have larger consequences.

When seeing a client, we will typically consider the following factors:

1. What is their marital status?
2. What types of beneficiaries do they have?
3. What types of gifts have been made in the last 7 years and are continuing to be made?
4. What are the other assets and liabilities in their estate and the size of their estate?
5. What are their own needs: both medical and financial?
6. Who lives with them in their property?
7. Any other factors that are particular to that person?

We can then provide the right type of advice for a client and these are the some the common considerations.

Care costs

Often, people are concerned with who will fund care and about their life savings being completely spent on care costs. There are several considerations to keep in mind.

Your Local Authority will do a care needs assessment which determines the kind of care that would meet your needs. This includes looking at whether your home needs to be adapted or whether you ought to move to a care home.

Next, the Local Authority would conduct a financial means test which calculates how much you need to contribute to your care. If the care needs assessment concludes that you should stay at home, the means assessment will not include the value of your property.

Even if the care needs assessment decides you ought to move to a care home, you may be eligible for support under the NHS continuing healthcare. If not, your home will still not be included in the financial assessment if your partner, and in some situations a relative, still lives in the property.

Sometimes, where we have clients who are a couple and one person is in a care home and the other still in their main residence, a life-time trust may be suitable. However, we always consider the rules around deliberate deprivation of assets, whether the couple are married, and who is changing their will.

It is sensible to get advice before deciding about the family home when you are in this situation as you do not want to be get caught by the deliberate deprivation of assets rules or opening your estate up to be challenged.

Residence Nil Rate Band and Downsizing Allowance

This was introduced in 2017 and is an additional nil rate band of £175,000 open for use where an individual is gifting their main residence to a direct descendant. The availability of the residence nil rate band is reduced by £1 for every £2 that an estate exceeds the value of £2 million.

The residence nil rate band can only be set off against the value of the property.

Example 1

Mr Brown owns a property worth £500,000 and has no other assets. He leaves his property to his daughter. His estate could use the nil rate band of £325,000 and the residence nil rate band of £175,000. There would be no tax to pay.

Example 2

Mr Green owns a property of £400,000 and has £325,000 in the bank. He also leaves his property to his daughter, but Mr Green also took out equity release on the property now valued at £300,000. Therefore, the value of Mr Green’s share of the property is only £100,000. Therefore, his estate can only use £100,000 of the residence nil rate band, not the full £175,000.

Sometimes what is less known is the downsizing allowance. This preserves the availability of the residence nil rate band when an individual has, on or after the 8th July 2015, downsized or sold their main residence but now leaves an equivalent amount to their direct descendants.

A common example of when the downsizing allowance would apply is where someone has sold their home to move into a care home and the sale proceeds are in their bank account.

Gifts with Reservation of Benefit

In Ola’s article, A Focus on the Family Home as a Tool for Inheritance Tax Planning, she explained how gifts with a reservation of benefit can cause unexpected results for individuals, usually with the result of an increase in inheritance tax to pay.

However, with careful legal planning, there are some exceptions to the gift with reservation rules.

Where the owner of the asset pays full market rent for their use or enjoyment of the asset

If a person sells their house at market rate (for example to a child) and then continues to live in the property but pays rent to that child at full market rent to remain living there or to visit (if it is a holiday home), then this will avoid the gifts with reservation of benefit rules.

However, note where someone has sold their property to a relative or friend at lower than the market rate, the difference between the actual sale price and the market rate will be treated as a gift to the person buying the property.

It is sensible to get legal advice if you are doing this so as to ensure that it is an effective gift and both parties are aware of the tax implications.

Where the original owner has little or no benefit from the gifted asset after it has been given away

Where someone has gifted their main residence and truly moved out, they must survive 7 years for the gift to be effective. There are some limited circumstances where the original owner can move back, for example if they are unwell and need to be looked after by the person who was gifted the property.

In all other circumstances, the original owner has to be careful to not visit and stay over so frequently that they could be criticised for not having truly moved out.

Where there is joint or share ownership and occupation of a property

Where parents and a child or children are both occupying the family home as their main residence and the parents want to reduce their estate for inheritance tax purposes, they could consider transferring part of the family home to the child.

So long as the parents (the original owners of the property) continue to pay for at least half of the outgoing bills on the property, they can gift a part of the property to their child, living in the same property.

They would need to survive 7 years and then the value of the gift would be removed from their estate. This needs to be done with careful consideration as this may not be suitable for every family.

Conclusion

We recognise that the family home is a major part in inheritance tax planning, but we always have to look at each situation in its entirety and understand our client’s backgrounds before we can give appropriate advice.

It is always sensible to get legal advice from a reputable source before making any changes to the ownership of your family home.

How can Morr & Co help?

If you have any questions or would like any further information on the content of this article, please do not hesitate to contact our Private Client team, by emailing info@morrlaw.com or calling us on 01737 854 500.

Disclaimer
Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.