illustration of a house with a broken chain
All families would be able to pass on £1 million tax-free across generations – this was George Osborne’s promise in October 2007.
The then Shadow Chancellor announced at the Tory party conference that the Conservatives would raise the inheritance tax threshold to £1m and exempt the “family home”.
And while it is true that a couple could theoretically pass on £1m, in reality Mr Osborne has got that figure in a complex combination of head allowance and a “family home”.
It would have been far simpler and fairer to increase the core allowance in line with inflation, which would now make it £1.75m.
Instead it has remained stable at £325,000 per capita for years. Why? The simple answer is that IHT is a big and growing money spinner for the Treasury.
The Office for Budget Responsibility expects IHT receipts to reach around £7 billion in 2022-23, rising to £8.4 billion by 2027-28.
Telegraph Money recently suggested some ways to limit the losses. This included greater use of the pension fund, and claiming the residence zero-rate band, introduced coincidentally by Osborne in an attempt to honor part of his earlier pledge.
In practice, the two biggest assets we are likely to have are our home and our pension. It can be understood in the budget announcement that the pension lifetime allowance tax fee is being abolished.
Because pension funds do not count as part of your wealth for IHT purposes, this opened up the possibility of making larger pension contributions, subject to an increase in the £60,000 annual allowance, thereby receiving a larger tax-free lump sum and allowing the balance The scope of keeping out increased. of IHT NET.
I’m afraid it may not be that simple. Firstly, of course, if we have a Labor government after the next election, they have pledged to bring back the lifetime allowance fee.
Secondly, you cannot be sure that the IHT benefits of the pension fund will survive till your demise. Apart from this, the tax-free pension lump sum may also be at risk.
This has been capped at 25pc of the current £1.073m lifetime allowance, or £268,275. In my view, it can remain frozen so that the dirty work of reducing it through inflation can be done surreptitiously.
What about the family home?
You can leave it to your children or grandchildren in your will and the estate will be taxed less the Additional Family Home Allowance. However, what happens if you bequeath property to your children during your lifetime, and expect to live for seven years and thus avoid IHT?
how to gift home
This can create a big problem if you continue to occupy the home.
The property will generally remain in your estate for IHT purposes as a result of the “reservation of profits” rules.
In addition, the property will cease to qualify for the personal residence capital gains tax exemption and the “basis cost” will not be increased to market value upon your death, as would otherwise be the case.
However, there are situations where a house gift can be effective.
Profit reservation rules will not apply if you pay full market rent for your children to live in their property.
This rent will potentially be withheld for income tax but if your child’s income is low this may not be a problem.
Obviously you should leave yourself enough to live comfortably and remember that the seven year rule is counted backwards from death so rent has to be paid for as long as you are living there or until your death .
I recognize that many readers will be intimidated by the prospect of having a roof over their heads, and good family relationships are clearly important in this.
Co-ownership is often overlooked but can offer huge IHT savings under the right circumstances.
For example, let’s say that your elderly mother is now living in her family home. She may gift half of her house to you with the understanding that you will stay with her for some time and pay your share of the expenses.
For that you will not need to pay rent and there will be no reservation of profit.
On her death, assuming seven years had passed, she would only own half the house and it would be valued at a discount – typically 15pc for IHT purposes.
You’ll need to have actual physical possession of the property, but it will only need to be part-time, such as a night or two a week or maybe holidays and weekends.
It doesn’t need to be your main home. You must also have a key and full rights to access. Another consideration is that additional council tax may apply.
If your mother later had to move into a care home, there is no reservation of benefits and her CGT private residence exemption will apply for three years.
You should take appropriate legal advice before proceeding.