Your Property and Inheritance Tax

For the vast majority of people, their houses are likely to be their most valuable assets.  As the value of property has risen much faster than the Nil Rate Band threshold, more and more people find themselves with an ever increasing Inheritance Tax (IHT) liability upon their homes.

Without sound IHT planning their surviving family could be faced with a very large Tax bill indeed after their death. In some cases the family may have to sell the property to pay the Inheritance Tax dues.

Often one of the biggest issues is how the value of the home can be removed from your Estate for tax purposes but for your surviving spouse to continue to live there.

Of course the exemption for the transfer of assets to your spouse can be used, as well as the transfer of unused NRB, but if no other IHT planning is put in place this usually simply delays the problem – the increased Estate of your surviving spouse will be liable for IHT upon their death!

 

Here is an interesting example of what could happen:

Mr. and Mrs. Adams have 4 children and have no specific IHT planning in place.

They have a house worth £600,000 and other assets worth an additional £274,000.

Mr. Adams dies first and all of his assets are left to Mrs. Adams. Bearing in mind the Spouse Exemption, no IHT is payable at this time. Additionally the NRB applicable to Mr. Adams can be transferred to Mrs. Adams upon her death.

 

When Mrs. Adams subsequently dies, IHT will become payable on her assets as follows:
 

Total Estate Value - £874,000

Less Nil Rate Band - £624,000 (£312,000 plus the transferred £312,000 – *assumes NRB threshold remains the same)

Total Taxable Estate - £250,000

Tax payable £250,000 x 40% = £100,000

Remaining Estate to be shared between 4 children - £774,000 (£874,000 - £100,000 IHT payable)

Each Child receives £193,500 (£774,000 divided by 4)

However the Tax Man would still receive £100,000!
 
Inheritance Tax cannot be avoided by gifting your house to your children and then continuing to live there. HMRC would regard the asset as a "Gift with Reservations" and it would continue to be regarded as part of your Estate. In some cases it could also become liable for Capital Gains tax if it was sold!

It has become quite common nowadays for Equity Release to be promoted as a method of releasing cash tied up in property. However, early release of Equity can be also used as a method of reducing potential IHT. The cash released could be gifted away and over seven years (during which it would be subject to Taper Relief) it would be transferred out of your Estate. In addition, the released cash could be used to set up a Discounted Gift Trust or Loan Scheme to reduce your IHT liability.
 
The suitability of Equity Release to reduce IHT liability entirely depends upon your individual circumstances as well as certain external influences. The interest rate of the Equity Release, the rate of increase of the Nil Rate Band and the rate of increase in the value of your property can all affect that suitability.

We always work closely with you to ensure that we fully understand your entire financial circumstances before recommending the most cost effective approach for you.

 

If you would like to speak to an adviser about reducing your IHT liability or arrange a no commitment consultation then contact us on 0845 0532965 or alternatively please use the Contact Us form.