As long as house prices rise faster than inflation, your home is likely to be the most significant contributor to the valuation of your estate. As property prices find a way to rise again, and news of a potential bubble continues to surface, the danger for some of us will be that the value of our home pushes us over the Inheritance Tax threshold when we come to pass our estate on to our loved ones.
Few of us dedicate significant time to re-calculating the value of what we possess, which means it can be a surprise to many to find that our estate crosses the £325,000 threshold. With house prices rising, the question of how to reduce the liability for 40% of the value of our estate, over £325,000, becomes all the more pressing.
Giving your home to your children or another beneficiary. You can give your home to your children - or someone else - at any time. For Inheritance Tax purposes, it's treated as a gift. However, doing this will trigger the rather morbid seven year rule (you will need to stay alive for seven years after giving it away for inheritance tax exemption to apply). If you give away your home, but try to continue to live there, it's known as a 'gift with reservation of benefit' and won't be exempt. You can make social visits and stay for short periods in the home you give away, but there are HMRC guidelines on how frequent the visits can be without inheritance tax being due.
Paying your children market rent. If you pass on your home to your children and continue to live there, you must pay the new owner (your children) a 'market rent' (the going rate for similar local rental properties). Alternatively, you can sell your home and give the money to your children as an inheritance tax-free gift, but this will again trigger the seven year rule.
Moving into your children's home. If you sell your home, give the money to your children and then move into their home, it counts as a 'pre-owned asset' and there might be income tax due if you don't then pay the market rent. If both you and your children sell your homes, pool your money and buy a new home to live in together, the part belonging to you is considered part of your estate for inheritance tax purposes, at the point you pass it on to either your children or another party.
Giving half of your home to your children. This again triggers the seven year rule but if you give half of your home to your children, they move in with you and share the bills, the half you have given them isn't part of your estate for inheritance tax purposes… as long as you survive the seven year rule!
Avoiding any of the 'gift' scenarios. If you decide not to 'gift' your home, how you pass your home on after you die depends on how you own it. If you own 100% of the home, the threshold will apply in full. If you and your spouse or civil partner are joint tenants and one of you dies, the other normally automatically gets their share of the house. If you own a home as tenants in common, you can pass your portion on to your children when you die and divide the property up between them and your partner. This can reduce the size of the estate for Inheritance Tax purposes.