Question
My mortgage is fully paid so my home is in my sole ownership.
If, with a view to reducing inheritance tax liability I give shares in my home to my two children, making them tenants in common with me, in what circumstances would I require to begin to pay rent in order to continue to live in the house?Answer
If you give away an asset but continue to use it without paying market rent/value then HMRC will view the gift as having 'reservation of benefit' and very likely void the gift for inheritance tax purposes, i.e. it will remain in your estate.
So in your example you will need to pay market value rent to your two children in proportion to their share of the home. For example, if the rental value of the home is, say, £2,000 a month and your children own 25% each then you'll have to pay them £500 each per month. Bear in mind that the rental income received by your children will be taxable as income, although they should be able to deduct ongoing maintenance costs for their share of the home.
Unfortunately there's no legitimate way around this that I know of. But it may be worthwhile on the basis that provided you live for at least 7 years after making the gift your children's share will fall outside of your estate hence won't be subject to inheritance tax. Obviously the answer will depend on your overall financial situation.
My mortgage is fully paid so my home is in my sole ownership.
If, with a view to reducing inheritance tax liability I give shares in my home to my two children, making them tenants in common with me, in what circumstances would I require to begin to pay rent in order to continue to live in the house?Answer
If you give away an asset but continue to use it without paying market rent/value then HMRC will view the gift as having 'reservation of benefit' and very likely void the gift for inheritance tax purposes, i.e. it will remain in your estate.
So in your example you will need to pay market value rent to your two children in proportion to their share of the home. For example, if the rental value of the home is, say, £2,000 a month and your children own 25% each then you'll have to pay them £500 each per month. Bear in mind that the rental income received by your children will be taxable as income, although they should be able to deduct ongoing maintenance costs for their share of the home.
Unfortunately there's no legitimate way around this that I know of. But it may be worthwhile on the basis that provided you live for at least 7 years after making the gift your children's share will fall outside of your estate hence won't be subject to inheritance tax. Obviously the answer will depend on your overall financial situation.
Read this Q and A at http://www.candidmoney.com/askjustin/849/give-children-some-of-my-home-to-avoid-iht
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