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Considering gifting your house
Despite recent problems in the Northern Ireland housing market we have still seen significant increases in house values over the long term. Inheritance tax (IHT) allowances have failed to keep pace with house prices and many more people now have to consider the IHT legacy they are leaving to their beneficiaries.
What options do you have to avoid IHT if your home takes you close to or over the current 2012/13 £325,000 individual IHT limit (or up to £650,000 for married couples and civil partners, if the unused portion of someone’s allowance passes to their spouse on death, without allowing unscrupulous or disorganised relatives to leave you without a roof over your head?
Despite all the urban myths, the one thing you definitely cannot do is simply sign your house over to your descendants and continue to live in it. This is called a 'gift with reservation' and is ultimately inefficient for tax planning purposes as the house will continue to form part of your estate. The only way to get round this is to pay the beneficiaries a market rent, but this is unlikely to be a popular option for those who have scrupulously paid off their mortgage in order to enjoy a comfortable retirement. It also opens the door to your house being sold from under you if your beneficiaries get into financial trouble.
So what options do you have? You could sell, move out and rent or buy somewhere smaller, gifting the balance of your gain to your beneficiaries. This is called a potentially-exempt transfer (PET) and becomes IHT-free as long as you survive 7 years. If you have a big enough house, you could arrange joint ownership and live together in the house. That proportion of the house then is then a PET and again, is IHT free as long as you survive 7 years.
For larger estates, there are some more complex schemes. ‘Shearing’ involves selling the freehold and obtaining a short-term lease. Another arrangement involves selling the freehold in return for a lease for life and cash. This cash goes into a trust and the freehold becomes a PET. However, such schemes need to be constructed with the help of a financial adviser to make sure they meet the regulations – and also to ensure that an equitable deal is done.
There are no easy ways to avoid IHT if a lot of your equity is tied up in your main house. However, you can at least maximise use of all the other allowances available to ensure you at least way lay the tax man and in the meantime, still keep a roof over your head.
Specialised/personalised advice is needed for IHT planning, please contact us.
Paul Dixon FPFS
Chartered Financial Planner