How to Make Inheritance Tax Savings
Nobody likes the idea of passing on Inheritance Tax (IHT) to their loved ones, so it’s worth investigating the opportunities available to ensure your bequest reaches your children, rather than the Taxman.
What solutions are there?
An obvious solution is to pass on gifts while you are still alive, and a holiday home would be a prime example. If the property was worth £200,000, this could make IHT savings of anything up to £80,000.
Watch out!
There is the seven-year rule to take into account i.e. if you pass away within seven years of making a gift/bequest, they return to your estate and, as such, become liable for IHT.
Another trap to be aware of is ‘reserved benefit’, and this raises its ugly head if you decide to make occasional use of the holiday home after transferring ownership. In the Taxman’s view, if you continue to receive any benefit from the property then it is still yours for tax purposes. Even if you’re only staying there for a handful of weeks per year.
It would be the same if the property given away were a collection of antique chairs. Say you gave the chairs to your daughter. If you then used the chairs during visits that would constitute a benefit, triggering IHT.
According to S.102(1)(b) of the Finance Act 1986, ownership of the property remains with the original owner 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…”
One way to demonstrate there is no reserved benefit would be to pay each time you use the property, based on current market rates. However this opens up a can of worms. Not only could this rack up thousands of pounds for you, but your children will also have to pay income tax on the monies received and ensure they keep accurate records for their tax returns each year.
A better solution
Give away a share of the property and move into a joint ownership. Assuming the seven-year rule is not activated, the gifted share would be excluded from your estate and not subject to IHT.
As before, the proviso is that there is no reservation of benefit, so you must each make some use of the property and pay identical amounts towards all of the running costs. The best way to administrate these transactions – and enjoy peace of mind -would be to set up a joint bank account.
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