Property and Inheritance Tax
Dentists, doctors or other healthcare professionals who own a holiday home might think that by giving it to their children – and just using the property now and again – they will save on Inheritance Tax (IHT). Sadly, this is not the case.
Continue to make use of your ‘gift’, and the property will be viewed by the Taxman as if it still belongs to you.
However, the idea is a tempting prospect. If your holiday home was valued at £200,000 and you gave it to your children, you could save up to £80,000 IHT. Provided that you didn’t expire within the following seven years, the house would no longer be considered part of your estate and no IHT on the property would be triggered.
Be careful of ‘reserved benefit’
The problem arises if you want to make continued use of your gift, even if it is only for a few weeks of the year. This is what’s known as ‘reserved benefit’ and it’s frowned upon by the Taxman. He considers continued use of such an asset to be evidence that you haven’t really transferred ownership at all, and the definition of a ‘reserved benefit’ can be exacting.
For example, rather than a house, say that the gift to your son or daughter was a set of antique chairs. If you then went to visit and sat on one of the chairs during your stay, you would be benefiting from use of the chairs. Because of this, they would still be considered your property and become subject to IHT.
The reason for this scrutiny comes from the wording of the law. S.102(1)(b) of the Finance Act 1986 states that a gift remains within the giver’s estate for tax purposes unless “…any property which is disposed of by way of gift is enjoyed to the entire exclusion, or virtually to the entire exclusion, of the donor…”
How much is ‘virtually entirely’ no usage?
So, the individual must receive ‘virtually entirely’ no use or benefit from the gift. This naturally begs the question “How much is ‘virtually entirely’?” It’s an important question, as if you get it wrong, your loved ones will be stung for IHT.
One solution the Taxman would have to accept would be to pay for any usage of the property at market prices, as clearly there would be no benefit received. But there are disadvantages for everyone else. First, this could potentially cost you thousands of pounds each year and, second, your rent would prompt income tax liability for your children, who would also need to have a full record of book keeping for their annual tax returns.
Gifting a share of the property?
A better way forward would be to gift a share of the property rather than the whole thing. Assuming you survive the next seven years, that share will not be considered part of your estate, so no IHT will be incurred on it.
Make sure that you transfer ownership of the property into both names and share out the running costs. It would be a good idea to set up a joint bank account for this. Providing that you and your child each make use of the house and pay equal amounts into the day-to-day expenses, there is no ‘reservation of benefit’, so no IHT.
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