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Dodging the IHT holiday home trap

 

If you plan to avoid Inheritance Tax by giving your holiday home to the younger members of your family, but still intend to use it from time to time, the Taxman has anti-avoidance rules to foil this arrangement. How can you dodge these?

The plan

As part of your financial planning you gave your holiday home to your children; it was worth £200,000 at the time, so your estate could save up to £80,000 of IHT. All you now have to do is survive seven years and hey presto! But you still want to use the property for a few weeks a year. Surely the Taxman won't begrudge you that?

No reservations

The Taxman's rule is that if you make a gift but continue to have use of it, then in his eyes you have "reserved a benefit" and not really given it away at all. You might think the Taxman has a point but he can be very strict on what constitutes a benefit.

For example, if you made a gift, say, some antique chairs, to your son and used them when you visited him, the Taxman may well consider that you are deriving a benefit and treat them as still yours for IHT purposes. Is he right?

The Law

S.102(1)(b) of the Finance Act 1986 says that if you make a gift, it will remain part of your estate for IHT purposes unless you are "virtually entirely" excluded from using or benefiting from it. So how much is "virtually entirely"? If your view differs from the Taxman's, your beneficiaries will have an uphill battle to avoid IHT. So what's the solution?

If you need any more information on inheritance tax or on any other tax issues, please get in touch with us on 0191 386 4786 or by emailing information@westwaters.com

Tip. You could pay the market rate for the use of the property. The Taxman will then accept there is no reservation of benefit.

Trap. Rent for use of the holiday home could run into thousands of pounds each year. Unfortunately, that's not the end of the story, it gets worse.

Out of the pan and into the fire

Paying rent may save you from the Taxman's IHT trap but now your children may have to pay income tax on the rent they receive from you. They will also have to manage the corresponding record-keeping for their tax returns. So what's the alternative?

Share and share alike

Tip. Only give your children a share of the property and retain a share for yourself. The share you give away will, subject to the seven-year rule mentioned above, not be part of your estate for IHT purposes.

Provided you all have use of the property and equally share the running costs, the Taxman will accept that there is no reservation of benefit and so not part of your estate for IHT. Once you have transferred the property into joint names you need to make sure expenses are shared. Here's how to do it:

Tip. Set up a joint bank account with your children solely for handling the property-related transactions. Each pay in an equal amount. The running costs can now be paid from this account ensuring that they are equally shared.

If you need any more information on inheritance tax or on any other tax issues, please get in touch with us on 0191 386 4786 or by emailing information@westwaters.com

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