Inheritance Tax: Home sweet home

SPONSORED: Much IHT planning focuses around Agricultural and Business Property Reliefs as these can provide 100 per cent relief against the value of someone’s estate upon death, or for lifetime gifts. However, for most people, the family home is the most valuable asset and is as important as any other when it comes to succession planning.  

by | 11 Oct, 2024

Chris Thorpe, tax advisor

Reliefs

The only relief specifically available for a residential property is the Residential Nil Rate Band (RNRB) – an additional zero rate of £175,000 for each individual to set against the value of their estate upon death – so is of no use for lifetime gifts. This is available when the residential property is bequeathed to/‘closely inherited’ by a lineal descendent (i.e. children, grandchildren, etc.).

Like the main Nil Rate Band, unused proportions of the RNRB is transferable between spouses on first death, but the relief is gradually tapered away if someone’s net estate, immediately before death, exceeds £2m. The RNRB is reduced by £1 for every £2 by which the estate value exceeds £2m.

Another relief is potentially available, in life or death, but only if the home is also a farmhouse, i.e. a home occupied by a farmer. Under the rules for Agricultural Property Relief (APR), the agricultural value of a ‘character appropriate’ house owned for 2+ years is relievable against IHT.

Tax on lifetime gifting

If a house is gifted from parents to the kids, it will be a Potentially Exempt Transfer (a ‘PET’) – provided the parents survive a further seven years, the value will be out of their estate.

Capital gains tax (CGT) is also in issue, but Principal Private Residence relief (PPR) should be available; this exempts from CGT a person’s (or married couples’) only/main residence. A married couple can only have one PPR between them, so if they own multiple properties an election should have been made within two years of their getting married or owning more than one property. 

However, if the parents are genuinely living in the gifted house, it is likely that HMRC would infer that as the PPR. The garden will also be included within the house’s exemption if within 0.5Ha (c.1.24 acres), but potentially greater acreage will be included if it is required ‘for the reasonable enjoyment of the dwelling house’.

Other land besides a garden

If any land consists of farmland, i.e. land occupied for the purposes of agriculture, then 100% APR will exempt the agricultural value of that land after two years’ ownership; if the land is tenanted (via a Farming Business Tenancy), then even after seven years’ ownership APR will still be available for the landowner. Gift holdover relief under  TCGA 1992, s. 165  is still available against CGT for tenanted and in-hand farmland.

If the land consists of commercial woodland (i.e. run on a commercial basis), 100% Business Property Relief should be available against IHT after two years’ ownership, with sales of timber (not the land) being exempt from CGT (as well as income/corporation tax).

Gifts with reservation

However, a simple seven-year PET is not necessarily the outcome if a home is gifted in life. The difference between the family home and other assets is that the home is just that – a home, which is lived in. Parents who are gifting a home may want to continue living in it for a little while afterwards; if this is so (and their children do not enjoy or take possession of it) the value will remain in the parents’ estate as a ‘gift with reservation’ (GwR). 

If the parents do remain in occupation of the house, but pay a market value rent, then the gift will be effective for IHT (though the rent still needs to be paid in the seven years prior to parents’ death). If rent is not paid then the gift will only be effective once the reservation ends (either the parents move out or start paying rent), with a deemed PET taking place at that point.

A gift of an ‘undivided’ share of the property (i.e. the parents gift a share of the house) will not be a GwR if the parents are not living in the house, or they are but pay at least the running costs commensurate with their share of the property.


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