The family home
For most people, their main asset is their home. Even a fairly modest house or flat in expensive areas like London or the South East can push you over the Inheritance Tax nil rate band.
Giving your home away during your lifetime, to your children for example, is unlikely to be a cracking idea. Having security should always be your biggest concern. And although you probably trust the person you would give it to, something could happen that was beyond their control - leaving you homeless.
If you give the house away but continue living there, it will still count as yours when they tot up the Inheritance Tax bill unless you pay rent to the owner at the commercial rate (or if the new owner lives there with you, you pay at least your share of the home-related expenses). This is because it will otherwise be counted as a “gift with reservation of benefit". If you are elderly or infirm, these rules may not apply - get specialist advice.
Do you own your home in one person's name?
If you do, then, depending on what else you each own, you might want to think about putting it into both names. You must get legal and financial advice about this however, as you would essentially be giving half of your house to your partner, which would be a real problem if you split up.
If you do pass half your home to your partner, you would not normally have to pay any Capital Gains Tax because it is his or her main home. But there may be Stamp Duty Land Tax to pay.
If you do this, you will need to take steps to avoid the “gift with reservation of benefit” rules. In practice, you can do this by continuing to pay your full share of the running costs of the home, and the cost of maintenance and improvements - and keep records to prove to HMRC that you did.
Do you own your home jointly?
There are two ways to own property jointly, and which you choose makes a big difference when one of you dies.
- Joint ownership – when one owner dies their share of the property automatically passes to the other joint owner (but that share still counts as part of the dead partner’s estate for tax purposes).
- Tenants in common – each joint owner has their own separate share of the property which can be left to whoever they like.
Leaving half the home to someone else
Most couples tend to own their homes as joint tenants. Changing to tenants in common is sometimes a good idea as it opens up the possibility of leaving half the house to the children. However, it is important to stress that this can be a really bad plan as it could result in the family home being half-owned by your partner, and half-owned by children who have moved away. This can, and does, sometimes cause serious problems, both legal and emotional, as your children and partner could fall out, or the children could try to force a sale. It is also important to remember that, if it is not the children's main residence, the increase in the value of their half since your death will be subject to Capital Gains Tax anyway.
To give or not to give?
Iris gave her holiday cottage in Devon to her children in January 2006. As it was her second home, not her main residence she had to pay Capital Gains Tax, even though no cash changed hands.
Sadly Iris died in December 2008. Because she died within seven years, the value of the property became taxable for Inheritance Tax purposes, so it ended up being taxed twice. Had she kept the property until she died, there would only have been Inheritance Tax to pay. There is no Capital Gains Tax on what you leave in your estate when you die.
Some people consider reducing the value of their property through various means.
If you have a mortgage, the amount you still owe will be set against the value of the home. So, for people who need more money during their lifetime, taking out a lifetime mortgage is worth looking into (If you don't need to free up money for use during your lifetime, a lifetime mortgage is not a good bet). Normally you don’t pay any interest until you no longer need the home (i.e. when you die or move permanently into care), when you pay it all in a lump sum, along with the amount borrowed.
Another possible route is selling part or all of your home to a specialist company or insurer (this is called “home reversion”). On your death the home is sold, the company gets its share and the rest goes to your estate. The downside here is that you don't benefit from any rise in value of the part you sold.
Both types of scheme reduce the value of your estate. However, there are big drawbacks with these schemes (often called 'equity release schemes'): the cost can be so high that it wipes out any tax savings, and they are only for people aged 60/65 and older. Do not consider doing this without expert advice.
Giving your home away
There are planning schemes that try to get around the 'gift with reservation of benefit' rules, and enable the owners to seemingly give the property away and yet keep living there. These schemes are usually now hit by the “pre-owned assets” charge, which means you have to pay income tax in some circumstances. If you are contemplating something like this, you must get advice from a properly qualified tax adviser.
