The family home will be liable for Inheritance Tax (‘IHT’) if the value of the home exceeds the available nil rate band upon the relevant individual’s death (the surviving spouse or sole owner).
The value above the nil rate band of £325,000 is potentially exposed to tax at a rate of 40% however there have been some changes in this area, primarily around the introduction of the new nil rate band for family homes.
New nil rate band
The July 2015 budget introduced a new nil rate band in relation to the family home. This measure introduces an additional nil-rate band when a residence is passed on death to a direct descendant.
This will be:
- £100,000 in 2017 to 2018
- £125,000 in 2018 to 2019
- £150,000 in 2019 to 2020
- £175,000 in 2020 to 2021
It will then increase in line with the Consumer Prices Index from 2021 to 2022 onwards.
There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.
Specific Planning
It is said that an Englishman’s home is his castle, and therefore any planning in relation to the family home is often an emotive subject and careful consideration must be taken before any action.
Direct Gifting
If a property is directly gifted to the next generation or via a trust structure there are two considerations. Firstly, a capital gain will be deemed to arise on the donor and this will create a charge to capital gains tax on the difference between the market value of the property at the date of gift and the original acquisition value.
The gain can be offset by a relief called Principle Private Residence relief (‘PPR’) if the property has been the donor’s main residence for all or part of the ownership period.
The second consideration relate to IHT. The gift would be a potentially exempt transfer and so if survived by seven years, the value would fall outside of the donor’s estate. Following making the gift it is important that the donor continues to pay market rent if they continue to occupy the property or if the property is not occupied by the donor, the ongoing use is kept to a specified amount.
The rental income would be taxable in the hands of the recipient donee and this unwanted tax affect combined with the loss of control of the family home by the donor makes an outright gift a difficult option for some.
Reversionary Lease Arrangements
In these circumstances the owner of a property grants a lease to the next generation or to a trust. The lease does not take effect for a specified period of time, for example 10 or 20 years. The owner can remain in occupation of the property and continue to enjoy the property until the lease period begins, after which they would need to pay market rent to the owner of the lease.
The value of the property’s freehold interest reduces from the date of the gift to the beginning of the lease. If the donor survives for seven years after granting the lese, this element of the value of the gift would fall outside of the donor’s estate for inheritance tax purposes.
Granting a lease over a property is a disposal for capital gains tax purposes. Provided that PPR relief is relevant this would mitigate tax due. Careful consideration of long term plans, including provision for the donor’s residency requirements in the future (for example in the event of ill health) are required given that HMRC have extensive anti avoidance rules in this area.
Multiple Ownership
In these circumstances gradual gifting of shares in a property to the next generation is intended to allow multiple ownership of one property in unequal shares. Each gift will need to be considered to ensure that there are no adverse consequences relating to CGT (again PPR relief is a valid consideration) and stamp duty (if the gifted portion exceeded £125,000).
By holding a property in multiple shares the original donor’s value is greatly reduced on the basis that the value of their share is diminished as the property would be much harder to sell and different owners would need to consent to one sale and give up rights to occupation.
Would you like help and advice on this or any other tax issue?
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This article was published in May 2018 – please be aware that the information above may have changed in subsequent months. This note is written for the general interest of our clients and is not a substitute for consulting the relevant legislation or for taking professional advice.