A-T-P! Avoid The Pitfall: I want to transfer my house to my children to avoid inheritance tax
The phrase “If something seems too good to be true, that something probably is too good to be true” is rarely incorrect and applies to a variety of situations from a bargain in the shops that later doesn’t work, to the perfect guy who eventually disappears, all the way to reducing your inheritance tax bill.
I recently received a query from a potential client who told me she had heard from her friend that if she transferred her house to her children then she would not pay any inheritance tax on her death. She seemed shocked when I began to explain that it wasn’t that simple.
As with all legal matters, there are a few “well it depends on…”, but generally speaking if you want to transfer your residential home to your children who do not live with you and stay in that home you will not avoid inheritance tax. This is because HMRC describe this as a Gift with Reservation of Benefit. You have gifted your home to your children (or someone else) and you have then reserved and held onto the benefit of living in and using that home. The consequence is that HMRC will include the value of that home in your estate when you die. Depending on the value of the rest of your estate, after the deduction of any inheritance tax-free allowances the remainder of your estate will be subject to tax at 40% (or 36% dependent on any gifts to charity).
In addition to the inheritance tax consequences, there are other matters to consider. The personal circumstances of your children could later effect your asset i.e. bankruptcy, divorce. You could all have a soap opera style family fall out and then you will be in a position where you co-own what is probably your most valuable asset with someone who has now blocked you on Whatsapp!
If you do want to explore tax planning it is key to do it with legal advice to indeed avoid the pitfall rather than rely on what you have heard. If you don’t, a simple idea can lead to stress for loved ones at an already difficult time further down the line.