Cash clinic: Joint occupancy can minimise IHT on home, but specific advice is vital

Q: MY father-in-law is in very poor health and it seems we will inherit his house when he dies. It is worth more than £700,000. What death duties would we have to pay; if we lived in his house would we still have to pay death duties, and finally, if we sold our small terraced house would we have to pay capital gains tax? MR, Dunfermline

A: UNLESS your father-in-law has undertaken some careful planning, then on his death inheritance tax (IHT) of 40 per cent would have to be paid on his estate above his unused nil rate band (currently 325,000).

Simply living in your father-in-law's house is unlikely to change the position. Even if he were to gift the whole house to you, if he continued to live in it he would still retain a benefit in the asset and so, on his death, it would still fall into his estate for IHT purposes. Joint occupation may have tax advantages in some circumstances, but this can be complicated and should not be undertaken without seeking professional advice.

As far as your own home is concerned, in general you would not pay capital gains tax on any gain arising on its sale unless you have lived elsewhere for a significant time during the ownership period.

Q: I HAVE cashed in a large number of shares following the exercise of share options in the company I work for and I know I will have a large capital gains tax (CGT) bill as a result. What can I do to reduce the amount of tax? PR, Livingston

A: I HAVE assumed that the shares were obtained under an approved share option scheme and are therefore subject to CGT rather than income tax. In the first instance, it is worth looking at any other investments you have to see if any are now worth less than they cost. In that case, you could create a capital loss by selling those assets, which could then be set off against the gains made in the current tax year.

If you do not have any such assets, it is possible to shelter the gain if you are prepared to re-invest some of the cash from the sale of the shares in special tax-favoured investments, such as shares in a company qualifying for the enterprise investment scheme (EIS). Provided certain conditions are met, investment in EIS shares can not only defer the gain on the sale of your shares, but also - as of today - give you 30 per cent income tax relief as well. However, since this type of investment is classified as higher risk (that is why they qualify for tax incentives), you should always take independent financial advice before making any decision.

• Neil Whyte is a tax partner with accountants and business advisers PKF

• If you have a question you need answered, write to Jeff Salway, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected].