The dangers of home DIY (*when it comes to inheritance tax planning)


Most people are familiar with the rule that making a gift and surviving seven years is a means of avoiding inheritance tax on the asset given away.

For many, their home is their most valuable asset. So, with a view to saving inheritance tax for their family, they transfer their home into the names of their children (who live elsewhere) while continuing to live in the home rent-free.

Unfortunately such tax planning falls squarely within a set of complex and far reaching anti-avoidance rules covering "gifts with reservation of benefit", namely the gift of an asset from which the donor continues to derive benefit.

This makes the gift ineffective for inheritance tax purposes: the home is still treated as forming part of the parents' estate on death and continues to be exposed to 40% inheritance tax.

But the bad news doesn't end there...

  • Aside from the inheritance tax treatment the gift is still valid for all other purposes, so legally the home belongs to the children from the time the gift is made. Any future decisions relating to the home would therefore be made by the children (including the parents' continuing right to occupy it), leading to a loss of autonomy and control on the part of the parents.
  • The home could become subject to financial claims in the event of one of the children getting divorced, or becoming bankrupt, which could prejudice the parents' ongoing occupation.
  • If a child dies during the lifetime of the parents, his or her share of the home would be subject to 40% inheritance tax.
  • Because the home belongs to the children from the time of the gift, any increase in value when they sell the home after the parents' deaths will be subject to capital gains tax at up to 28% in addition to the 40% inheritance tax borne by the estate on death. So not only is there no tax saving, the family could actually be significantly worse off from a tax point of view.

Tax planning involving the family home is fraught with difficulty and should not be entered into without expert advice and careful consideration of both the tax and non-tax implications.

Unfortunately the fact that £372m of gifts have "gone wrong" over the past three years suggests that many families are still taking the DIY approach.

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The taxman has cashed in on £372m in "gifts gone wrong" over the past three tax years, as unwitting families fall foul of complex tax rules
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