If I Want to Save Inheritance Tax I’ll Just Give My Property to My Kids!

This is a HUGELY UNWISE thing to do! If you give your property to your children whilst you are still alive – you have LOST ALL CONTROL of that property. It no longer belongs to you, and although (hopefully) the children have given you a right of residency within it for as long as you live,  it now belongs to them, therefore, it is they and they alone, who decide what happens to it.

So having made this arrangement, what would happen if one of your children had a marriage breakdown which resulted eventually in divorce? That child’s share of the property in which YOU live, would become part of that child’s divorce settlement. The house may have to be sold to fund that payout. Likewise, what if one of your children had a problem with alcohol, drug, or other dependency and had debts to settle? Thay may be ordered to be made from the sale of the property in which YOU live.

That’s not all either – from a tax viewpoint, the situation can also be unfavourable. HMRC would need to be made aware of the situation and would ask, as you no longer own the property, how much rent you pay to live there. They would then ensure you pay a market rent (not a peppercorn rent) to your children. Your children would then pay income tax on this as it is classed as income to them. Finally, if they sell the property at some time, the difference between the sale price and the price when you gave it to them will be considered a Capital Gain and be taxed accordingly!

Mitigation of Inheritance Tax (IHT) is not easily achieved on something like your primary residence, as you have an interest in possession in it. That is to say, because of the fact that you own it and live in it, your interest is that it puts a roof over your head and therefore, HMRC state you have an interest in possession and therefore it is not allowable against IHT mitigation. However, that does not necessarily apply to other areas of your Estate – so for example, you may own other property, which may be able to be considered, by use of Trusts, as potentially exempt from IHT. It depends on the value of the asset and whether you are able to live without any income it produces by declaring yourself “excluded” from the Trust.

For more information and if appropriate, a discussion with one of our advisors, please contact us.