TT47: Inheritance Tax & Family Home

December 24, 2003

A growing tax attack
Inheritance Tax (“IHT”) used to be paid only by the wealthiest people in the country, but now many ordinary homeowners, especially those who live in the South East, are under attack. A rising property market combined with an IHT threshold that barely changes each year have contrived to make IHT a painfully real liability for thousands of families
The first line of defence
The IHT nil rate band is currently £255,000 – and husbands and wives get one each. Thus, in theory, a husband and wife can have assets up to £510,000 without any IHT liability. However, a common pitfall is that one nil rate band gets wasted because, on the first death, one spouse leaves everything to the other. It is therefore most important for each spouse’s Will to feature a nil rate band discretionary trust clause. If the only meaningful asset is the family home, the nil rate band trust can be funded by debt secured on the family home, providing it is jointly owned as “Tenants in Common” rather than as the more usual “Joint Tenants”.
A sophisticated plan for expensive properties
For very valuable properties it will be necessary to swap the existing house (being an appreciating asset) for an interest in the house (which will be a depreciating asset). It will also be important to avoid making a Gift with Reservation of Benefit (“GROB”). All this is possible using a “Reversionary Lease”. This works by you owning the freehold of the family home but establishing a family trust and granting the trustees a 999 years lease over the property, at nil rent, subject to the lease not taking effect until the earlier of your death or (say) 35 years elapsing. The full procedure can be explained in detail by your Barnes Roffe contact partner.

When you die the lease commences and swamps the value of your freehold interest making it worth very little – probably nothing at all. For IHT purposes, the value of the property has simply evaporated; the whole value of the property is now held by the family trust, which was established with a tiny transfer of value. There is a capital gains tax disadvantage that will have to be managed as the trustees will have a low CGT base cost and no main residence exemption. This problem can possibly be remedied by the trustees appointing the property to a new trust and a beneficiary occupying the property as their main residence.

Barnes Roffe Topical Tips

  • Ensure your Wills are correctly drafted to make use of both available nil rate bands.
  • For valuable properties, consider using the Reversionary Lease arrangement, particularly if you are unlikely to want to move form your current family home.
  • Remember, the arrangement is also suitable for holiday homes and investment properties because GROB issues are avoided and because IHT and CGT liabilities can be side-stepped.

Topical Tips is designed to be a simple and useful source of ideas and information for clients and contacts of Barnes Roffe LLP. If you are unsure about the implications of any idea contained therein please contact your Barnes Roffe LLP partner. Barnes Roffe LLP cannot take responsibility if the ideas are implemented without its involvement.

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