For property owners looking to reduce their Inheritance Tax liability, gifting property and leasing it back could be a sensible option. With any Inheritance Tax planning exercise, it is vital that proper advice is taken on your personal circumstances. The process will need to be handled carefully, to ensure that the value of the property is not included in your estate valuation when you pass away, and also to ensure your security during your lifetime.
Under the law of England & Wales, every person is allowed to pass a certain amount of assets, without Inheritance Tax being payable, when they die. Currently, this amount is £325,000 per person. The full amount is usually available, unless part of this allowance has been used up by the deceased during their lifetime. There are further exemptions and allowances for Inheritance Tax, for example on gifts made to a spouse, a Civil Partner or a charity. It is always sensible to take personal legal advice tailored to your circumstances, to find out exactly what allowances might be available to your estate when you pass away.
The standard rate of Inheritance Tax is currently 40% on any amount that you own which is not covered by exemptions or allowances. For most people, this means that anything they own over £325,000 will be subject to Inheritance Tax at 40%.
For many people, particularly those living in the South East, the value of their property will take their estate above their allowance.
Gifting your home
Many people often consider gifting their home to their children during their lifetime, in order to reduce or avoid any Inheritance Tax on their death. However, the laws and rules surrounding Inheritance Tax and gifting are complicated, and gifting your home during your lifetime is not as simple as you might first think.
If you gift your home to someone else during your lifetime, and go on to continue to live there until your death, you will not actually have given away all the value of your home. HM Revenue & Customs views this as you retaining a benefit in the gift you have made. The result being that the value of your home will still be included in the Inheritance Tax calculation when you die.
A potential solution to this is to give your home away during your lifetime and lease it back at a full market rent. Provided you live for a further seven years after making the gift, whatever you have given away should not generally be included in the valuation of your estate for Inheritance Tax purposes (provided you have not retained any benefit in it, and you have not created certain trusts).
A further potential benefit is that rent payments can also reduce the amount held in an estate. Rent payments would not be classed as a gift, so Inheritance Tax should not be payable on the amounts paid for the leaseback of the property.
This is a very simplified summary of how a gift and leaseback of a home might work. It is vital that anyone considering these sorts of Inheritance Tax planning measures takes legal advice on their personal situation. This is a complex area of law, and it is easy to fall foul of the rules, without taking the proper advice.
The implications of giving away property
While gifting and leasing back a property can be advantageous, it is important to take legal advice from an expert before going ahead. The below examples are just some of many implications to be considered.
Risk of losing your home
In addition to legal and tax implications of giving away a property, it is also important to consider the security of the person living there. If you own your own home until you die, and you have no outstanding mortgage or other charges over the property, then usually there is no one who can force you out of your home. However, if you give your property away, so that you then have to lease it back from the new owner, you will not have the same security as when you owned your home yourself.
There are many different circumstances that could arise unexpectedly, which might result in the original homeowner being forced out of the property. For example, if the new owner goes through a divorce, their interest in the property would likely be included in any financial assessment, and the property may then have to be sold. Similarly, if the new owner struggles financially and becomes bankrupt, their Trustee in Bankruptcy may be able to use the property towards clearing any debts owed. There are options that can help protect against these situations, however these are a few examples of why advice should always be taken before giving away your home, and how complicated the situation can become.
Living costs and care fees
It is also important to ensure that the person making the gift is financially able to pay a full market rent for the rest of their life. It should be considered whether they will have enough money to cover other living expenses that are payable now, or that might become payable in the future (for example, care home fees). If this is not properly considered, or carefully planned, this could affect the level of state funded care that would be provided in future, if the person making the gift ever needs to move into a care home.
Other tax implications
Finally, there could be other tax implications of gifting your home. In addition to Inheritance Tax, both Income Tax and Capital Gains Tax could be payable in relation to the gift of your property and any rent that you pay in leasing back the property from the new owner.
Before taking any action or deciding to gift and leaseback your property, you should always take legal advice, as it may not be the right option for you and could have serious practical, legal and tax implications.
If you are considering Inheritance Tax planning or thinking about giving away your home during your lifetime, and would like to speak to one of our expert Wills and Probate and Estates lawyers, please call us on 01252 733 770 or email us at email@example.com to make an appointment for a meeting at our Farnham based office.