Looking to reduce the inheritance tax (‘IHT’) that will be payable on your death is a sensible part of your overall estate planning, and giving away your property during your lifetime might be one way of achieving this.
However, before doing so, care must be taken to ensure any lifetime gift is made effectively. If such care is not taken, it could result in the value of the gift being subject to IHT on both the recipient’s and the donor’s deaths, essentially resulting in a double tax charge.
By way of example, it would not be effective for IHT purposes for an individual to give her house to her children but continue to live there, or to give them a valuable picture whilst leaving it on her wall, unless in either case she paid her children a market rent for her continued enjoyment of the property/picture. The rationale behind this is to combat instances of donors looking to transfer property outside of their estate, while continuing to derive a benefit from it. These are known as the ‘gift with reservation of benefit’ or ‘GROB’ rules.
But what if an individual gives her house, in which she continues to live, to her children and her children move in too? This is an increasingly common scenario as it enables the children to care for their elderly parent as well as benefit from a “pre-inheritance”.
In this case, you could fall outside the GROB rules, which contain an exception where there is co-occupation. If the donor does not receive any benefit (other than a negligible one) then the gift of the interest in the property will be a potentially exempt transfer and, provided the donor survives making the gift by seven years, the interest in the property will not form part of her estate for IHT purposes on her death.
However, if at any stage her children cease to occupy the property or the donor receives any more than a negligible additional benefit from gifting the property (and the costs of the property’s upkeep, and crucially who pays for them, will need to be very carefully considered), then the gift will again be caught by the GROB rules and the value will fall back within the donor’s estate. This will be the case whether or not the donor has survived making the original gift by seven years.
As with all IHT planning, consideration must be given not only to the various other taxes which may be engaged (for example SDLT if the children will be taking on the liability for their share of any mortgage, and capital gains tax if the property has not always been the donor’s principal residence) but also to the practicalities of the IHT planning and the impact on those involved. In this example the co-owning children will have the rights of co-owners, including the ability to force a sale of the property if they went to Court (for example in the event they were to become bankrupt or divorced). They would also have the ability to resist a sale or re-mortgage of the property if so desired by the donor. It should also be remembered that once something has been given away, it cannot be taken back and so you should only ever give away what you can afford to do without.
Lifetime giving can play a very useful role in your estate planning but care must be taken to ensure it is done effectively and free from inadvertent negative consequences, tax related or otherwise.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.