SHOULD I GIFT MY HOUSE TO MY CHILDREN TO AVOID INHERITANCE TAX?

We have this scenario a lot. The starting point is, “I want to give my house to my children – should I do that, and how do I go about it?” It’s a question that I have been asked on a regular basis for as long as I have been practising as a lawyer.

And what the client tends to think is going to be quite a simple and quick discussion actually unfurls into a multilayered discussion. It’s almost like an onion and you’re peeling away at the layers, there are a lot of things to consider.

We solicitors sometimes get a bad rap for overcomplicating things, but gifting your house to your children is not a straightforward issue. Let’s start by thinking about inheritance tax – will gifting your house to your children mitigate it? Well, if you gift your house and you survive for another seven years, then that asset falls out of your estate, in theory not being subject to inheritance tax, but there are a number of things to be aware of.

Firstly, there are rules about ‘reserving a benefit’, so if you give your house away and continue living there – for however many years – you’re reserving a benefit, unless you pay a full market rent for your occupation, so the house would still be part of your inheritance tax estate.

Other practical things to consider include your children’s own circumstances – what happens if your child is married, and after you have gifted them your house they unfortunately begin divorce proceedings? They now have an extra asset, namely your house, and the divorce proceedings could have a massive impact on what happens to that asset.

What happens if they go bankrupt? Your house would be another asset in their estate which would have to be taken into consideration.

Another thing to think about is if you gave the house to the children outright, as mentioned above, you’ll still be liable for inheritance tax unless you are paying a market rent, and if you want to move and the house is sold, it’s the children’s asset. As they don’t live there, you have lost that principal private residence exemption from a capital gains tax perspective, which you would have if you owned the property and lived there. Yet another level of complication to consider!

From an inheritance tax perspective, depending on the value of your house, it may not be such a problem for the property to remain within your estate, because since 2017 we have had an additional inheritance tax threshold, directly related to your residence, when it passes on to your descendants.

In the current rules, an individual can have an extra £175,000 – if they have that equity within the residence – which they should effectively be able to pass on to their descendants tax-free. And remember, that is £175,000 per individual – so for a couple who are married or are registered civil partners owning a house together, that’s potentially a combined total of up to £350,000. That’s actually quite a valuable exemption to have.

However, advice should be taken as to whether the additional threshold will apply to your particular circumstances, because if the net value of your estate (after deducting any liabilities but before reliefs and exemptions) is above £2 million, the additional threshold will be tapered away by £1 for every £2 of the net value exceeding £2 million.

It’s important to take a step back when thinking about your house as a planning tool. It’s not just planning for a tax on your capital, such as inheritance tax. You’ve got to step completely back and say this is my home, this is my house, it’s not just a capital asset, it’s much more than that.n

For more information about wills and planning for your future, contact the Lanyon Bowdler team in Conwy on 01492 557070 or visit www.lblaw.co.uk