How to save tax on your main home

How to save tax on your main home
The Speechly Bircham guide
Despite recent property market conditions, most
homes have increased substantially in value. This has
put a smile on the face of the taxman as well as
homeowners as the long-term rise in property values
has increased the Government’s inheritance tax (IHT)
– and capital gains tax (CGT) – take.
So are there any ways of shielding the value of
our home from the taxman?
Yes, most certainly.
Wealth Protector
We suggest the first step for married couples (and
civil partners) is to put in place Speechly Bircham
Wealth Protector wills, which save extra IHT on the
survivor’s death. These are described in our Wealth
Protector booklet.
Saving tax on your home
We’ve made tax-efficient Speechly Bircham wills. We
know how much tax they can save. But can we take
any other steps now, in our lifetimes, to save IHT?
In many cases, yes. This booklet shows you how.
It describes how to save tax in your lifetime on your
main home, and what traps to avoid.
Giving your home to your children
A popular way of trying to avoid IHT in your lifetime
is to give all or part of your home to your children.
The idea is that, if you survive the gift by seven years,
it will be free of IHT on your death.
Unfortunately this does not work. As you still live in
the home, the gift is ineffective for IHT. It is called a
gift ‘with reservation of benefit’, and you are treated
for IHT as still owning the property.
But this kind of gift is worse than ineffective. What
you give away no longer qualifies for the principal
private residence exemption from CGT. Usually when
you sell your home there is no CGT to pay. But if you
have given your home away, the exemption will
generally be unavailable when it is sold. So there
will be a large – and unnecessary – CGT bill.
Nor is that all. Giving your home to your children
jeopardises your security. After all, when your home
is sold you may need the proceeds to fund your next
home, your own lifestyle or long term care. But if you
fall out with any of your children, they could
withhold the proceeds or even force a sale against
your will. And a child’s share could pass outside the
family if he or she gets divorced, dies before you or
gets into financial difficulties.
So, giving any part of your home to your children is
a bad idea.
Giving your home to your children is a bad idea
What other options are there?
Selling your home to your children
Instead of giving your home away, what about
selling it to your children?
Consider Mr and Mrs Smith who own The Pines
worth £800,000. They decide to sell it to their
children for £800,000. Subsequently they give
the £800,000 cash to the children.
Provided these steps are carefully structured and
the Smiths survive the £800,000 cash gift by seven
years, their gift should escape IHT.
But there are still some major problems:
• your children may not have enough cash to buy
the property
• your children will have to pay stamp duty land tax
on the purchase
• your children will not qualify for the main
residence exemption, so when the property is sold,
CGT will be payable if it has grown in value
• your security will be at risk if any of your children falls
out with you, gets divorced, is made bankrupt or dies.
This option also has too many drawbacks.
Paying a market rent
Another approach involves giving all or part of your
home to your children and paying rent. So long as
you always pay a full market rent, your gift should be
effective for IHT.
But this approach also has several disadvantages:
• you need to be sure you will have enough money
to pay the market rent for the rest of your life –
it could increase substantially over the years
• as your children own the property but do not
occupy it, CGT will be payable when it is sold if
it has increased in value
• your security may be at risk.
The Rental Strategy
Speechly Bircham have found a way round
these problems.
This is how it works…
Mr and Mrs Thomson’s home is worth £1m. As
they enjoy a good index-linked pension, they feel
they can afford to give a half share of their home
to their children – provided their own security is
not jeopardised.
A saving of over £450,000 after eight years
Using the Speechly Bircham Rental Strategy, they
each give a quarter share to a special Trust. This has
the following benefits:
• the Trust preserves the main residence exemption:
as long as Mr or Mrs Thomson occupies their home
as their main residence, there is no CGT to pay
when the house is sold
• the Thomsons’ security is protected: they can act as
trustees and the Trust safeguards their right to live
in their house (or a replacement property) for the rest
of their lives
• there is an extra IHT saving: paying rent is not a
gift. So the rent the Thomsons pay falls out of the
reckoning for IHT immediately: there is no sevenyear run off
• income tax savings: whoever receives the rent
must pay income tax on it. But the Trust is
designed to allow the family to reclaim the tax
where possible, for example by channelling the
rent to non-taxpaying beneficiaries, such as the
Thomsons’ grandchildren to pay school fees
• there is no stamp duty land tax.
This is what it saves…
Suppose the Thomsons survive eight years and the
house doubles in value during that time. Assume
also that the rent is initially £20,000 and increases
by 5% per annum.
After eight years the IHT saving would be
over £450,000.
The next step
If you would like to find out more about the Rental
Strategy, just fill in the enclosed Asset Summary and
send it to us at the address below. We will contact
you to discuss how we can reduce your IHT bill.
Initial meeting
The cost of an initial meeting is £400 plus VAT. If you
then ask us to implement the Rental Strategy – or to
put in place Wealth Protector wills – the meeting fee
is waived.
Contact details:
The Home Planning Team
Speechly Bircham LLP
6 New Street Square
Tel: 020 7427 6400
[email protected]
Speechly Bircham LLP
6 New Street Square
London EC4A 3LX
Tel +44 (0)20 7427 6400
Fax +44 (0)20 7427 6600
DX 54 Chancery Lane
[email protected]
Speechly Bircham LLP is a limited liability partnership registered in England and Wales
(registered number OC321620) and is regulated by the Solicitors Regulation Authority.
The firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain
circumstances to offer a limited range of investment services to clients because we are members of the
Law Society.
© Speechly Bircham LLP 2008