Could I move in with my parents to save IHT?
Q: I have recently gone through a divorce, so my parents have offered for me to move back into the family home with them. It's my childhood home; they've lived there for about 40 years and they are now in their 80s - so the home could do with a little renovation.
I've offered to secure a mortgage of around £150,000 to carry out the work on the house, so that the three of us can carry on living there. My parents have offered, in exchange, that they would gift me the house, so that when they pass away, I wouldn't need to worry about losing our home - and it would be free from Inheritance Tax. Are there any risks we should be aware of if we go ahead with these plans?
A: Beware of taking care when it comes to family living arrangements. This sounds like it could end up being trickier for you in the long run and there are a number of things to consider.
But first, to the point about Inheritance Tax (IHT). Your parents could gift you their house, but they must then survive for seven years after that gift is given in order for there to be no IHT to pay. Having said that, if HMRC deem someone to be continuing to benefit, they may still consider it as part of the deceased’s estate - i.e. in your case, your parents would still be living there, so there's a grey area as to whether or not the house would continue to be part of their estate. HMRC has been clawing back £608 million from families falling foul of the rules in cases such as these.
Other taxes such as Capital Gains Tax and Stamp Duty Land Tax would need to be considered when gifting a property is contemplated.
There are other, more complicated issues to consider. Firstly, have you considered what might happen if you were to pass away before your parents? Or, how would your mortgage get paid if you were to lose your job, fail to pay the mortgage or become bankrupt?
Thinking of the future
Also, have you thought about what might happen in the future in terms of your parents' health? You mention they are already in their 80s. What if they require care or need to go into a care home? Fees are often assessed on assets, and many people rely on the sale of their home to fund any care needed. If councils suspect a chance the house was transferred to you so that you could apply for the optimum amount of state care, you might find yourself in trouble - even if that isn't the case.
Also, you may marry and have a family. You may want your family to inherit your interest in the property should you die before your parents. Would your parents’ position be compromised?
It might be safer for your parents to keep the house in their name. We each have an IHT threshold of £325,000 (known as the Nil Rate Band) so your parents have a combined threshold of £650,000. There is also the Residence Nil Rate Band (RNRB) which could make that threshold up to £1 million - and this allows family members to pass on their family homes more easily and hopefully pay a smaller amount of IHT, if any - but it is essential you seek the right advice on this.
Contact the Private Client team at Downs Solicitors to see how we can help.