Your House & Inheritance Tax
For most of
us our house is our largest
asset. It poses a dilemma for many couples - how to remove
the value from the estate, but allow the surviving spouse to
live there.
Despite the recent slump, house prices have risen much
faster than the Nil Rate Band (see
Exemptions & Allowances).
The Nil Rate Band has generally, until recently, only increased at about the
same level as inflation, which has meant that more and more of
people's money has been subject to Inheritance Tax. The
introduction of the transferable nil rate band has helped in
some cases.
It is
not possible to avoid Inheritance Tax by giving your house
to your children and then continuing to live there. This would
be a "gift with reservations". HMRC
would take the view that as you continued to live in the
house that it was not really a gift, and it would be liable
to Inheritance Tax. If you paid a commercial rent to the new
owners, usually your children, Inheritance Tax could be
avoided. However, the rent would be taxable as income on the
new owners and the property could be subject to capital
gains tax on its subsequent sale!
In
recent years there have been some clever trust schemes,
which have enabled people to put their house into trust but
continue to live there. This type of scheme proved very
popular and successful and was in fact perfectly legal.
Unfortunately, in 2004 the Chancellor put an end to this particular
use of a trust, by creating an income tax charge in such
instances.
There
are however some easy steps which can be done to reduce
Inheritance Tax. One such method is using a Will Trust and
making use of the Nil Rate Band (see
Inheritance Tax & Married Couples for a
worked example). This works well for couples provided the
property is held as "tenants in common" which can be easily
arranged.
Equity Release
and Inheritance Tax
It is
also possible to use Equity Release to mitigate your
Inheritance Tax liability. Equity Release is often thought
of as a means to release cash from the value of your property
for people who are "asset rich - cash poor." But it can also
be used to reduce potential IHT.
The
cash released can be given away, and after 7 years would
fall outside of the estate. It could also be used with other
options such as a Discounted Gift Trust (see
Avoiding Inheritance Tax),
and benefit from an immediate reduction.
How
successful Equity Release is at saving Inheritance Tax, and
being cost effective
depends on a number of factors. It depends on how fast the
Nil Rate Band increases, it depends on the interest rate of
the Equity Release, and it also depends on how much the
house increases in value.
As
Chartered Financial Planners we will only advise you when
we have discussed your entire circumstances. We will discuss
the advantages of using Equity Release, and its
disadvantages. We will also discuss the other options
available and help you make an informed choice.
Whatever your circumstances we can help you. If you want to know how
you can reduce your inheritance tax liability and want to speak
to an adviser or arrange a consultation, without cost or
obligation, then call us now on 08000 112 034 or
contact us
online.
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