Death:
The family home
For many people the family home is the most significant asset they own but inheritance tax planning opportunities are limited. Simply giving the house away and continuing to live in it does not work for inheritance tax (this will be a “gift with reservation” and the house will be included in your estate for tax purposes until you move out).
Most people want to keep living in their house until they die and maybe for their surviving spouse to continue to live there afterwards. It may be a practical option to sell the family home, buy somewhere smaller and give away the surplus cash (which will drop out of your estate for tax after 7 years) but this will not suit every family. Such a move may also help to protect assets from local authorities seeking contributions to care costs (as long as the sale is not in contemplation of this) and so may be worth considering. If this is not a viable option you need to consider alternatives.
The family home may be owned:
- In the sole name of one spouse: as a sole owner the property can be left under the deceased's will to whoever he or she choses.
- As joint tenants: as joint owners, the survivor inherits the deceased's share of the property (which is deemed to be held in equal shares) automatically. The property cannot be inherited through a will, as it passes by survivorship.
- As tenants in common: a joint tenancy can be severed to create a tenancy in common and this is usually the starting point for any inheritance tax planning involving the family home.
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Tenants in common
As tenants in common, the property can be held equally or in different shares perhaps to reflect the relative financial contribution of each spouse. The share in the property can be disposed of under the deceased's will so that it no longer passes automatically to the surviving spouse.
With the property now owned as tenants in common, further planning opportunities are available.
- Property share left to surviving spouse - effectively this undoes the creation of the tenancy in common and leaves the full value of the property in the spouse's estate and does not use the deceased's nil rate band. Not normally recommended unless other circumstances dictate otherwise.
- Property share put into trust for spouse for life – this still leaves the full value of the property in the surviving spouse's estate for tax purposes and does not use the deceased's nil rate band. It may be suitable for other reasons but does not reduce the inheritance tax charge on the property.
- Property share left to the children - this can have many practical disadvantages even though the surviving spouse can continue to live in the property. As joint owners the children could enforce a sale and also have a right to occupy. In the event of, say, a child’s bankruptcy or divorce the property may have to be sold. Unless the child has lived in the property throughout his or her ownership, it may not qualify in full for the principal private residence exemption from capital gains tax when sold. In practice this may not be the preferred solution.
- Property share put into a trust - This may be challenged by HM Revenue & Customs on the basis that, in reality, the trust is for the spouse for life and the property is therefore within his or her estate. There are arguments against such an HM Revenue & Customs challenge - for example the surviving spouse occupies the property by virtue of his/her own ownership rather than as a beneficiary of the trust. As in all cases involving trusts or tax planning, careful attention to detail is necessary.
- Debt or IOU scheme – Typically a discretionary trust is set up by the will with assets equivalent to the nil rate band, and the residue of the estate passing to the surviving spouse. The trustees have the power to accept an IOU or charge over the property in lieu of physical assets. The deceased's spouse's nil rate band is not wasted and the surviving spouse continues to live in the family home until he or she dies.
We are not considering artificial schemes involving more than one trust, the creation of leases or other complex transactions as we do not believe they are appropriate for the majority of people.
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Where next?
Within Inheritance tax planning…
- Exemptions and reliefs
- Making best use of your nil rate band
- Business protection
- Life assurance and pensions
- Deed of variation
- IHT efficient investments
General…
