Inheritance tax planning for main residence
Table of Contents
Looking for Inheritance tax planning for your main residence? Find my tax tips below.
Selling the main residence: IHT implication
- Sell the property, downsize, and give a donee a financial gift from the sale proceeds. In order to use the remaining funds to buy a less expensive property, the gift’s amount must be sufficient to bring the taxable estate’s value below the exempt level. Given that there is no retained advantage, the gift of cash is judged to be theoretically exempt (PET: Potentially Exempt Transfer) for IHT charge purposes. As a result, there are no issues with “Gift with Reservation of Benefit.” The donation, however, won’t be entirely IHT-free until the donor has lived for seven years.
- Lease the property back after selling it to a donee at market value, paying the full rent to live there. The money obtained could subsequently be used for spending or given as PET gifts. The recipient will benefit from any capital gains because the recipient obtained the purchase money through a qualified loan. Practical concerns include the seller’s security of tenure, the need to pay stamp duty and land tax on the sale, the recipient’s obligation to pay income tax on the market rent, and the possibility that the recipient won’t qualify for the capital gains tax principal private residence relief upon the subsequent sale of the property.
The additional ‘Residents Nil Rate Band’ will be available should an owner downsize or cease to own a main residence and assets of an equivalent value, up to the value of the additional ‘nil-rate band’, are passed on death to direct descendants.
Gifting The Main Residence: IHT implication
- Give the house as a gift, yet live there while paying full market rent. The gift will be a potentially exempt transfer (PET), and the donee will be responsible for paying income tax on the rent.
- Mortgage the house, giving away the proceeds or invest the money in assets that potentially do not attract IHT, for example AIM shares. After two years, the investments should qualify for 100% relief from inheritance tax. However, mortgage interest will be charged. The funds borrowed could be gifted as a PET.
- Move to a rented property and gift the property. The gift will be a PET. If the gift is made within 18 months of the date of moving no capital gains tax will be charged if the property has been the individual’s only or main residence throughout the period of ownership.
NOTE: The suggestions above will need to take into account the additional ‘Residents Nil Rate Band’ available should a main residence be passed on death to a direct descendant (or the owner downsizes or ceases to own a main residence) and assets of an equivalent value, up to the value of the additional ‘nil-rate band’, are passed.
Sales Post Death: IHT Implication
Beneficiaries under a deceased’s will are deemed to inherit the assets at market value as at the date of death. However, if a property is sold within four years of death at a lower price than the value used for the probate value used for the IHT calculation on the estate, that earlier IHT liability can be reduced by substituting the lower sale proceeds for the agreed value, therefore saving the estate IHT.
The relief is known as ‘loss on sale of land relief’ and should more than one property be sold in the four years after death, then the sale price of all those properties is substituted for the values at death.
Where relief is claimed, the sale price must be substituted for the probate value for all properties sold within the four-year period. The executors cannot choose the value which gives the best result – the same approach must be applied consistently.
This relief is not available where either:
- the difference between the date of death value and the sale price is less than £1,000 or 5% of the value on death, whichever is the lower or.
- the sale is to the spouse/civil partner, children or remoter descendants, trustees or a person who had an interest in the property at any time between death and the date of sale.
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