Various organisations study the impact of this and recent findings suggest just over half of privately owned properties (not including those which are rented out) have two or more spare bedrooms, and nearly 9 out of 10 privately owned properties have one spare bedroom. One could argue that the costs of moving home, including Stamp Duty Land Tax, are a big factor that may put a homeowner off downsizing to a smaller property.
When it comes to inheritance tax planning, many will think about giving away an interest in their home, as this may seem the simplest way of reducing the size of their estate and therefore the burden of IHT. In most cases this will not work due to anti-avoidance rules known as ‘gifts with reservation of benefit’. These rules prevent any inheritance tax savings where a person gives an asset away whilst continuing to enjoy or benefit from it. So giving away your family home, or an interest in it, and continuing to live in the property is not effective for inheritance tax purposes. The gift will have a ‘reservation of benefit’ and continue to be taxed as part of the individuals’ estate on death.
There are some limited options which will allow a gift to be made without a reservation of benefit arising. The most common is the payment of rent to remove that ‘benefit’. There would have to be a significant inheritance tax saving for someone to give away their family home and then to pay a market value rent for the rest of their lives to continue living in it. The rent option is also not tax efficient from the perspective of the person receiving the property, or an interest in the property, as that rental income will be subject to income tax. Furthermore, if a person is in this situation, and ceases to pay the rent then the gift with reservation rules will come back into force – this would be particularly problematic in the 7 years prior to death.
A lesser-known option is that of joint occupation, which we discuss here. There is an exemption from the ‘reservation of benefit’ rules where an undivided share of land or property is given away and both the donor and donee jointly occupy the property once the gift is made. In this option, there is no need for the payment of rent, and the gift of an interest in the property will leave the donor’s estate once the normal 7 year rule has been met. For more information on lifetime transfers and the significance of the 7 year rule, please refer to our guide here.
An obvious situation where this exemption might be incredibly valuable for someone is where they are already jointly occupying a property with their child or intended beneficiary but without having gifted an interest in it. An example we have seen is where a parent or parents have their adult child move back in with them. Giving away an interest in the property can significantly reduce the parent’s exposure to inheritance tax, providing the gift is executed properly and the conditions for joint occupation are met in full.
The joint occupation rules do not necessarily require the donee (such as the child) to live in the property the whole time however, there would need to be a significant pattern of joint occupation. It is also important that the donee does not infer some sort of benefit on the donor such as paying for more than their share of living expenses.
Importantly, for the exemption to apply the donee would need to continue jointly occupying the property with the donor for the remainder of the donor’s life. This makes it more suitable where the joint occupation arrangement is likely to be permanent.
In situations where joint occupation is being considered, it is often necessary to take specific advice, to ensure matters such as the extent of the interest being given away, what is required to satisfy the joint occupation conditions, and the legal aspects of the gift and what this means in the future, are fully understood.
For the right circumstances this not well-known area of inheritance tax law can provide substantial tax savings alongside allowing families to begin the transition of property ownership from one generation to the next.