Your home will, in all likelihood be your biggest asset, but it also comes with emotional baggage and for most people it is not simply bricks and mortar, but a storeroom of family memories. Home is, after all, where the heart is and there is no place like it either. That adds to the very practical considerations and complications for those looking to pass it on to the next generation during their own lifetime.
That very act is usually driven by entirely sensible reasons, namely removing your most valuable asset from your estate in case you threaten the inheritance tax (IHT) threshold. IHT is no longer just the preserve of high-net-worth individuals as house price increases have nudged many towards the £1m threshold that many couples enjoy. Each individual has a “nil-rate band” of £325,000, plus, if certain conditions are met, a £175,000 residence nil-rate band before IHT kicks in.
According to the latest UK House Price Index a detached home in Scotland has increased in value by 17.2% in the year to June 2022, with the average detached home now worth £353,000. For those enjoying the benefits of larger properties in desirable areas around the country they might also find that one single asset has edged them close to that £1m mark.
There is no point in plumping up your estate unnecessarily simply for the tax authorities to take a sizeable bite out of the pot you are perhaps looking to leave to your children. So, what can you do to avoid passing the buck, literally, to HMRC?
Clearly a home is not a flexible asset and unlike a share portfolio can’t be broken into chunks and distributed. The implications of passing on your home are also widely misunderstood and some of the language around the process can be quite intimidating. HMRC talks about ‘anti avoidance provisions’ and local authorities, when assessing care home funding, reference ‘deliberate deprivation of assets’. Your act of kindness, or sensible planning, has suddenly taken on a new dimension when challenged in that way.
It is, however, an area of tax planning that is growing in popularity despite the pitfalls that can come with it. It is possible to gift your house to your offspring and remain in it. However, that being the case, you must pay a full market rent and your share of the bills, otherwise it will still be treated as forming 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 face the full IHT liability. From years three to seven there is a sliding scale, called taper relief, with your liability gradually reduced to zero at the end of that time.
On a very practical level it is a simple enough process, but it can leave some feeling vulnerable having handed over ownership of their home. Well intentioned planning can falter if family relationships break down or one of your children faces bankruptcy or divorce. This can be fraught with problems and painful repercussions if circumstances change and with every family transaction proper communication and understanding is essential. All parties must be aware of the risks involved as there is nothing more fragile than a divided family.
Then of course there is the thorny issue of care home fees. If your local authority deems that you have deliberately reduced your assets to avoid paying fees, they may include gifted assets in their assessment and calculations. As ever, there is a plethora of schemes and advisers who will claim they can help you round this, but the warning klaxon should always sound, as the rules are strict. Aggressive planning is not usually trouble-free and rarely comes without danger. Professional advice is essential and solicitors are best placed to advise what will actually work and what might just be a spurious claim.
Andrew Paterson is a Partner with Murray Beith Murray