Tristan Noyes looks at some inheritance tax planning techniques with the family home and rental properties.
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A question often asked is: “Can I give all my assets to my children and avoid inheritance tax (IHT)?”.
The short answer is yes, but to avoid the tax, you need to live seven years from the gift and cannot benefit from the asset after the gift. If you continue to ‘enjoy’ the gifted assets, this is treated as a gift with reservation of benefit (GROB) and remains in your estate for IHT purposes.
Family home
Due to the GROB anti-avoidance rules, it is therefore not possible to simply transfer your home to your children and continue to live there.
Nor could you give a rental property to your children but continue to receive the rental income.
In either scenario, the property remains in your IHT estate.
All is not lost
There are, however, some relaxations to these rules relating to property, which can be useful if structured correctly:
(a) Paying rent
If you pay full market rent for the use of the property after you have given it to your children, this takes it outside of the GROB rules. Note that you will need to continually monitor the level of rent to make sure it is at a market rate, and your children will need to pay tax on their rental income.
If you stop paying the rent, then the house immediately becomes a GROB and is back in your estate, so you need to be prepared to continue paying rent until you die or move out of the house.
(b) Joint Occupation
The GROB rules do not apply if you give away a share of a property and occupy it jointly with the donee. So, you could give a share of the house to your child and cohabit with them. This is not a GROB, and after seven years, the value of the gift is outside of your estate.
However, you need to make sure you share the running costs of the house between you, proportionate to the share gifted. Again, the child would need to continue to live with you until your death to avoid it subsequently becoming a GROB.
(c) No Occupation
A further exemption exists for a gift of a share of a property which you do not occupy.
This could be useful if you wanted to gift a former home or a rental property to your children and you do not want or need to live in it in the future.
Have your cake and eat it too?
The final exemption (where you do not live in the property) has no restriction on receiving the ongoing rent. So, you could transfer (say) 50% of a rental property to your children but agree with them that you would continue to receive (say) 85% of the rent.
As this is a gift of a share of the property and you do not occupy the property after the gift, there is no GROB even though you receive more than your 50% share of the rent. You will, of course, need to pay income tax on the rent you receive (i.e., the 85%), with your children being taxable on the rent they receive.
Practical tip
If you have a holiday home or rental property and rely on the income to fund your expenditure, consider transferring part of the property to your children and retaining the bulk of the income. Assuming you survive seven years, you can get a substantial amount of value out of your estate without losing the benefit of the rental income. Remember that you may have to pay capital gains tax on the gift if the property has appreciated in value, and if there is a mortgage on the property you will have to deal with the bank and potentially stamp duty land tax (or equivalent taxes in Scotland or Wales, if applicable) on the transfer too.
