I have concerns about the Inheritance Tax that might be due when I die.  A very large portion of my wealth is tied up in my house and I use my other assets – investment funds mostly – to provide me with sufficient income to meet my needs and maintain the house.  The house is worth about £950,000 and has been in my family for generations, so I want to spend the rest of my life here, although it is too big for me, really.  I have been considering giving the house on to my son now and converting part of it for me to live in as a separate apartment.  Will that work from a tax perspective?

Carl Lamb of Smith & Pinching Responds

This is an extremely complex area of Inheritance Tax (IHT) legislation so I can only give you some general guidance here.  The first thing to say is that if you make a gift of an asset, its value will normally be considered outside your estate after seven years.  However, if you continue to benefit from the asset after you’ve given it away, a set of rules known as “gifts with reservation of benefit” apply and your asset may well be considered as continuing to be part of your estate for IHT purposes, even though in name it belongs to someone else.  This could lead to a higher IHT bill than anticipated on your death.

There are two scenarios where you could potentially mitigate the IHT liability in this case.  Firstly, the rules do allow for you to give a portion of your home away and then share your home with the person to whom you’ve given it.  You would have to share the costs of running the home fairly too.  You could then leave the remaining portion to him on your death, with the remaining portion only being counted in the IHT assessment, provided you have survived seven years after making the initial gift.

The second scenario would be for you to gift the property to your son then pay him a full market rent for your share of it.  The rent should be treated as a commercial transaction and reviewed on a recurring basis.  Ideally you would set up a tenancy agreement with your son and pay your rent regularly rather than on an ad hoc basis.   Your son would need to declare this as income and pay any tax accordingly.  Again, the value of the house would only be fully excluded from your estate after seven years.

I strongly recommend that you meet with an independent financial adviser and get full advice so that you understand how much of your estate will be exempt from IHT – that will depend on your personal circumstances – in order to put together a detailed plan to mitigate it.

Any opinions expressed in this article do not constitute advice.

Carl is a Director and Chartered Financial Planner at Smith & Pinching