Gifting your house

Inheritance tax (IHT) allowances have failed to keep pace with house prices and many more people now have to consider the IHT burden they leave to their beneficiaries.

In the current tax year of 2018/19, your individual IHT allowance stands at £325,000 (£650,000 for married couples and civil partners), with an additional “main residence nil-rate band” of £125,000 per person. This means that parents or grandparents can leave a property worth up to £900,000 to their direct descendants before IHT kicks in.

Despite all the urban myths, the one thing you definitely cannot do is simply to sign your house over to your descendants whilst continuing to live in it.

Despite all the urban myths, the one thing you definitely cannot do is simply to sign your house over to your descendants whilst continuing 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 around this is to pay the beneficiaries a market rent; however, this is unlikely to be a popular option for those who have paid off their mortgage in order to enjoy a comfortable retirement. Your beneficiaries will also have to pay income tax on the rental income; moreover, it leaves you vulnerable to the possibility that the house might have to be sold from under you if your beneficiaries find themselves in financial trouble.

So what options do you have?

You could sell, move out and rent, or buy somewhere smaller and gift 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 seven 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 becomes a PET and again, is IHT-free as long as you survive for seven years. However, for most these types of arrangements will prove to complex or onerous to consider.

As you know at Expert Wealth Management we prefer a simple approach that is easy to understand and does not tie you up in complexity. Before tinkering with the ownership of your family home we believe there are many other aspects of IHT planning that you can consider first. For this it is best to speak with a Chartered Financial Planner in the first instance.

 

Dominic

About the Author

Dom is a qualified and experienced Chartered Financial Planner (CII) and Chartered Wealth Manager CFP (CISI) and a Registered Life Planner (Kinder Institute) with over 30 years experience. His work primarily focuses on retirement income planning, helping clients to maintain financial dignity and independence in retirement. Read more from Dominic...
This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
Dear Dom, Thank you for a very helpful meeting this afternoon. I always find seeing you a valuable reflective space, not least because you are such an excellent listener and so self-evidently a safe pair of hands. CL & MF (Oxford)

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