Tuesday, September 27, 2022

What you can do to avoid literally passing the buck when you leave your home to…

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As you can imagine, handing over your home to your offspring is a simple matter, but there are tax pitfalls. The timing and method of doing this can create complications and land you in the crosshairs of HMRC – it’s never a pleasant place to be without the safety net of professional advice and support.

Your home is likely to be your greatest asset, but it also comes with emotional baggage and for most people, it’s not just bricks and mortar, it’s a storehouse of family memories. After all, home is where the heart is, and there is no other place like it. That’s on top of the very practical considerations and complications for those who want to pass it on to the next generation during their lifetime.

This act is usually driven by perfectly reasonable reasons, which is removing your most valuable asset from your estate should you threaten the Inheritance Tax (IHT) threshold. IHT is no longer just for wealthy individuals as house price hikes have pushed many towards the £1million mark that many couples are enjoying. Each person has a ‘zero rate band’ of £325,000 plus, if certain conditions are met, a zero rate band of £175,000 on residence before IHT kicks in.

According to the latest UK House Price Index, a detached house in Scotland has appreciated in value by 17.2% in the year to June 2022, with the average detached house now being worth £353,000. For those enjoying the benefits of larger properties in desirable areas across the country, they may also find that a single asset has brought them close to that £1million mark.

There’s no point in adding to your wealth unnecessarily just so the tax authorities can take a tidy bite out of the pot you might want to leave your kids. So what can you do to avoid literally passing the buck to HMRC?

A home is clearly not a flexible asset and unlike a stock portfolio, it cannot be broken into pieces and divided up. The ramifications of passing on your home are also commonly misunderstood, and some of the language used in the process can be quite intimidating. HMRC speaks of “anti-circumvention provisions” and local authorities refer to “willful confiscation of assets” when assessing care home funding. Your act of kindness or sensible planning has suddenly taken on a new dimension when challenged in this way.

However, it’s an area of ​​tax planning that’s growing in popularity, despite the pitfalls that come with it. It is possible to gift your house to your descendants and stay in it. However, in this case you must pay a full market rent and your share of the bills, otherwise they will continue to be treated as part of your estate for IHT purposes. As with any gift, the seven year rule still applies and if you die within three years of the gift you will have to face IHT’s full liability. From years three to seven there is a sliding scale called taper relief, with your liability gradually reducing to zero at the end of that time.

On a very practical level, it’s a fairly simple process, but it can make some feel vulnerable when they’ve passed ownership of their home. A well-intentioned plan can be shaken when family relationships break up or one of your children faces bankruptcy or divorce. This can present problems and painful repercussions as circumstances change, and proper communication and understanding is essential in any family transaction. All parties must be aware of the risks involved, as nothing is more fragile than a family divided.

Then, of course, there’s the thorny issue of nursing home fees. If your municipality believes that you have deliberately reduced your assets to avoid paying fees, they may include donated assets in their assessment and calculation. As always, there are plenty of schemes and advisors out there claiming they can help you get around this, but the warning horn should always sound as the rules are strict. Aggressive planning does not usually go smoothly and is rarely without risk. Professional advice is essential and lawyers are best placed to advise on what actually works and what might just be a false claim.

Andrew Paterson is a partner at Murray Beith Murray

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