Gifting property and leasing it back is a great option for anyone looking to limit the amount of inheritance tax they can expect to pay.
Our Wills, Trusts and Probate Team can help you do this to ensure that the value of your property is not included in the estate valuation.
However, this isn’t the right option for everyone so it’s important to know how making this decision could impact upon you.
When someone dies and the value of their estate is more than £325,000, Inheritance Tax is payable. That is unless they leave everything above this amount to a spouse, civil partner or charity.
If you leave your home to your children or grandchildren, then there is an additional allowance of £175,000, which increases the threshold to £500,000.
If your spouse or civil partner died before you and didn’t use their Inheritance Tax allowance, it can be used for your estate, bumping up your total allowance to £1 million.
The standard rate of Inheritance Tax is 40% of the portion of the estate above the thresholds so lots of people will find the value of their property is taken above the allowance.
Gift and leaseback of your home
One way of lowering the amount of IHT payable is to give your home away while you are living, and lease it back at full rent.
Provided you live for a further seven years after making a gift, whatever you have given will not generally be included in the valuation of your estate for Inheritance Tax purposes, provided you have not retained any benefit in it.
However rent is paid at the full market value. If it is not, HM Revenue & Customs may believe you have made a ‘gift with reservation of benefit’, eg. not a full gift of your property, and you’d find you still had to pay Inheritance Tax.
In addition, rent payments have the potential to reduce the amount held in an estate. They are not classed as a gift, so Inheritance Tax isn’t payable on the amounts paid.
More points to consider
- If you don’t pay full market rent, authorities may believe you have retained a benefit.
- Any rental agreement should be formal with proper paperwork.
- Valuations should be found so rent payments can be verified.
- Whoever makes must be able to pay a full market rent for the rest of their life and still have enough cash to pay for things like care home fees, for example.
- Consider how safe your gift is as if you gift your property to your child and they subsequently divorce, their spouse could be entitled to half. We can help you put a property into a trust to avoid this happening.
- If it is your second home, you will be liable for Capital Gains Tax. This means your child (for example) would pay income tax on the rental income they receive from you.
- Inheritance Tax is payable on a sliding scale if you happen to die within the seven years of making a gift.
Can we help you?
While gifting and leasing back a property can have many benefits, it’s important to take legal advice before going ahead as there are many legal points to consider.
Need to contact one of our experts? Our Wills, Trusts and Probate Team is happy to help with any IHT queries.
We are back in the office on January 3, so give us a call on 01772 799600.
Article by Zoe Fleming