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How gifting property can impact IHT liabilities

It is important to consider factors beyond tax savings when IHT planning.

John Rouse, partner in the Private Client team at Lodders, discusses how the gifting of property impacts inheritance tax liabilities, how gifts with reservation of benefit work, and key considerations to make with regards to IHT planning.

The tax-free threshold for Inheritance Tax (IHT) has been frozen in cash terms at £325,000 since 2009/10. As everything above that threshold is taxed, larger estates can be subject to a substantial bill.

Whilst there are planning strategies individuals can take to mitigate their tax liabilities, ranging from lifetime giving, to wills and post-death planning, the area of IHT is highly complex, with the rules governing it often causing confusion.

Gifting property

A popular IHT planning strategy is to make gifts of assets. Where the asset is a property other than the main house, any gift will be a disposal for Capital Gains Tax (CGT) purposes, so a straight gift will often trigger a CGT liability.

The interaction between IHT and CGT is key to IHT planning, as potential CGT liabilities are one of the most common issues preventing the gifting of property. In certain circumstances, the use of discretionary trusts that qualify for CGT holdover relief can help to postpone any immediate CGT liability, but this will move the potential CGT liability further down the line rather than eliminate it.

Gift with reservation of benefit

It is also important to be aware of the reservation of benefit rules and the seven-year clock when it comes to gifts. Generally, for a gift to be effective for IHT purposes, you must survive the gift by seven years. Also, you cannot continue to benefit from the property you have given away as, if you do, it will be treated as a gift with reservation of benefit (GROB), meaning the asset will continue to be treated as part of your estate for IHT. To continue living in the property and avoid a GROB arising, you must pay a market rent for your occupation, and this must be kept under constant review.

IHT planning considerations

When considering IHT planning, it is crucial to carefully consider factors beyond tax savings, such as security and peace of mind. Utilising your primary residence for IHT planning warrants caution due to potential implications. Gifting your main home could result in the loss of benefits associated with the IHT residence nil rate band, valued at £175,000 per person (£350,000 for couples). When gifting property to children, be aware of the risks – if they get divorced, are declared bankrupt, or pass away, then your home would be considered their asset, and you would have no control over the property, even though you may be living in it.

Exercise caution when gifting property as a way of reducing potential care bills. Local authorities have rules to deem that a gift is not effective in preventing the property from being considered as part of your capital in a financial assessment.

Speak to us

It is always advisable to seek legal advice regarding IHT planning – the specialist knowledge of an estate planning solicitor is vital for determining the most suitable strategy tailored to your unique circumstances. For further advice and guidance on issues surrounding inheritance tax, get in touch with our Private Client team here.

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For help with a legal problem or more information on any of our services at Lodders, please get in touch with our friendly team. You can contact us via the number or email address below, or fill in the form and we will get back to you as quickly as we can.

Emily Brampton, Lodders Solicitors

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