Home truth on tax dodge
MANY people dream of giving away their worldly wealth to spare loved ones a hefty inheritance tax bill when they die, but it is not always easy.
Former Countdown host Anne Robinson revealed she has given away her £50million fortune to avoid handing it to the taxman, but without careful planning this could backfire.
Sean McCann, chartered financial planner at NFU Mutual, said many want to gift property to children to escape inheritance tax (IHT) or care home fees, but warns: “Unless done properly, you or your family could end up with an income tax, capital gains tax (CGT) or IHT bill anyway.”
HMRC is not the only threat. If your local authority decided you gave away assets to deliberately avoid care bills, known as “deprivation of assets”, it will charge as if you still owned them.
If you gift your main home or a second property to children, this will be ruled a potentially exempt transfer, which means you will need to live for another seven years for it to be completely IHT-free.
If you die within three years, IHT is charged at the standard 40 per cent. Thereafter it falls on a sliding scale.
Giving away your home brings few benefits if you plan to continue living in it, McCann said. In that case, it will be treated as a “gift with reservation”. “Unless you pay a market rent, HMRC is likely to include it in your IHT calculation anyway.”
To get around this, ask three local estate agents how much they would charge to rent out the property and pay the average to your children. “Review the rent regularly and keep a record of payments,” McCann said.
Your children will need to declare the rental income. “If they subsequently sell the property, they will need to pay CGT on any rise in value since you made the gift.”
Another option is to gift a proportion of the home to any adult children living there, to reduce an IHT bill. “They must continue to occupy the property with you and pay an appropriate share of the outgoings.”
One risk is that an adult child could try to force a sale of the property. “If the child moves out, the parent must pay a market rent for their portion of the property, to comply with ‘gift with reservation’ rules.”
If you gift your main residence, there is normally no CGT to pay at the time, but your children may face a bill when they later sell the property.
The rules are different if gifting a second home. In this case, you could pay CGT at up to 24 per cent.This will be charged on the rise in value since you bought it, after offsetting any money you spent to enhance its value.
Shaun Moore, tax and financial planning expert at Quilter, said if you gift a property to your child you can only stay with them for a maximum of one month a year. “If staying there alone, this falls to just two weeks. Otherwise gift with reservation rules apply and it will be added to your estate when you die.”
Gifting your home to a child also means you have no rights to the property. “If you fell out, or the recipient were to get divorced or become bankrupt, it could be lost.”
Beware other costs, too. “If you gift a home that still has a mortgage, your child might have to pay stamp duty.”