Saving IHT on the family home

Frozen nil rate bands

While the inheritance tax (IHT) nil rate bands (NRBs) look generous, rising property values are increasing the chances of a hefty IHT bill. Currently, if an estate is worth more than £325,000, IHT at 40% is payable on the excess. Plus, there’s an additional NRB of £175,000 where an estate includes a property (or value derived from a property) which was the deceased’s home. For estates worth more which include a residential property further planning is possible to reduce IHT.

Tax-saving tactics

Basic IHT planning involves making gifts out of an estate and surviving at least four years, but ideally seven as the gift then escapes IHT. This tactic isn’t easy to put into practice if a large part of the estate’s value is tied up in the individual’s home. One option is to downsize to release cash to give away. However, where moving home isn’t suitable there are alternatives but these require care if the anti-avoidance rules are to consider.

GROB rules

The gift with reservation of benefit (GROB) anti-avoidance rules mean that if someone gives away an asset but continue to use or obtain a benefit from it, it remains part of their estate for IHT purposes. For example, if a parent transferred ownership of their home to a child and continued to live in it. Only when they cease to do so will it count as a gift for IHT purposes

The GROB rules don’t apply if the transferor pays the transferee rent (at the market rate) for use of the asset they gave away. This can work especially well as an IHT-saving mechanism because the rent the transferor pays also reduces their estate without the seven-year wait.

The problem with this is that the rent is taxable income for the recipient. If they pay tax at basic rate (20%) or less this type of gift and rent arrangement still saves tax overall but is less effective than a plan which avoids tax altogether. Additionally, the rent must be reviewed regularly to ensure a market rate continues to be paid.

An alternative arrangement is for the owner to give away a share of the property and for the transferee to occupy the property with them. The running costs of the property must also be shared. Moving in with an elderly relative might seem like a drastic move but saving tens of thousands in IHT is a powerful motivator. In any case, a full relocation isn’t necessary.

Relaxed living arrangements

The transferor and transferee don’t need to live in each other’s pockets. There only needs to be some shared occupation. For example, the home could be divided into different living areas so that the transferee and transferor could largely live apart.

If the property is large enough to be divided into two separate residences and the transferor only occupies one, this would allow them to give away the other residence without the GROB rules applying. However, if they visited the other residence, say because they gave it to a relative, the amount of time spent in the property must be minimal or HMRC might argue that the GROB rules apply.