The rising value of group homes means that many retirees are living within a potential tax liability.
The number of people in the UK who pay Inheritance Tax jumped by 24% in the last year, with 41,000 properties trapped in the IHT network, almost double the number three years ago.
Should this bother members of the older generation who live happily within their greatest asset? IHT bills are not their problem. The problem of sorting everything falls on the younger generation, but more and more people are seeking advice from tax consultants.
Devising a property strategy for relatives in their later years isn’t just about reducing IHT bills, it’s also motivated by how best to care for them.
FT reader Pauline is a case in point. His 83-year-old mom is still sharp as a pin, but she’s struggling to move. She lives alone in the former family home in Brixton, South London. Bought for a song in the 1970s, it is now valued at around £1million.
Pauline would find it much easier to take care of her mother if they both lived under the same roof. Moving in with her mother is not an option and her current home is not suitable. So they talked about joining forces and buying a property with an outbuilding or granny’s flat.
However, Pauline soon ran into the estate tax brick wall, an increasingly common problem. I spoke to tax planning experts about the financial and emotional aspects families need to keep in mind.
Processing “what ifs”
You may want your relative to sell to avoid IHT. They, on the other hand, may be very keen NOT to!
“Don’t underestimate the emotional impact of losing control of the roof over your head,” says Sally Ashford, a partner at law firm Charles Russell Speechlys. “It might make perfect sense from a tax perspective, but older people can feel very vulnerable.”
She advises her clients to come up with a long list of “what ifs.”
“What if you move in together, but argue with your child? What if you need more care than they can provide? And if your child’s marriage fails or he dies, will your position be protected? And what if one of you wants to sell, for whatever reason?”
Sally Ashford, partner of Charles Russell Speechly: ‘Don’t underestimate the emotional impact of losing control of the roof over your head’
He has seen examples of multigenerational living working well and some clients saving “substantial amounts” of IHT. But there’s also a high potential for litigation, especially if multiple siblings are involved, who could potentially inherit.
“Taxes shouldn’t be the driver of any decision. Decide first what you want to achieve, then seek advice on finding the most tax-efficient way to do it,” she says.
Now, for the tax issues
If Pauline’s mother dies tomorrow, the family would face a potential £200,000 IHT bill for her £1million home. Advisers say the numbers often come as a shock.
All adults are eligible for a £325,000 nothing rate bracket and many, including Pauline’s mother, also benefit from £175,000 zero rate range of residence. The spouses can transfer this allowance between themselves on death, meaning up to £1m can be transferred tax-free, but Pauline’s mother is not a widow: she is divorced, so her ex-husband’s allowance is went with him. When she dies, 40% of her taxes will be charged on the rest of her estate.
“The options for mitigating IHT bills when the family home is the biggest asset are complicated,” says Claire Roberts, tax partner at Moore Kingston Smith, an accounting firm.
Most people are aware of the seven-year rule: if you donate assets and survive seven years, the gifts will be considered outside your estate for tax purposes.
Is possible to buy IHT insurance to cover any liability if you die early, but the older you are, the more expensive it will be. In any case, this will not protect you from the tax complications that can arise from another possible solution: giving away a property that you still intend to occupy.
In these cases, families risk not respecting the Grob rules (a gift subject to benefits). “Being able to live for free within a gift is definitely a plus,” says Ashford.
To prove otherwise, you’ll need to pay your children market rent, but unless you have other assets to draw on, this may be impossible.
In Pauline’s case, her mother would need to come up with between £3,000 and £4,000 per month rent a comparable three bed house in Brixton. Not only would Pauline and her siblings be subject to income tax on their rental income, but they could also face future capital gains tax, as this property is not their primary residence.
If your relative needs to go to a care home in the future, there is a risk that the transfer of ownership of the family home could be seen as a deliberate deprivation of possessions (unless done well in advance). . “If they were in good health at the time of the gift, local authorities would be hard-pressed to back it up, but they all differ in how they approach this,” adds Roberts.
Join forces
Pauline’s idea of buying a more suitable house jointly with her mother would not necessarily have been treated as a “Grob” if they had a joint occupation.
“Mom should pay for use of the property her own way, have her name on bills, and be able to provide proof of payment of her share of household expenses,” says Roberts.
Further complications will arise from how the property is divided and what will happen to his mother’s share in the future.
There is a risk that a shared home will have to be sold to meet future taxes or to divide an inheritance with other siblings. Relatives who provide the most care may be promised (or expect to receive) a larger share of the assets when the time comes. If so, an up-to-date will is required, ideally with a letter of expression of wishes. Careful record keeping is also a must.
Alternatively, downsizing to a smaller property or using the equity release may offer an easier solution. This could free up money to improve the quality of life of older relatives or finance future care costs, plus they could use a myriad of them donation allowance to consume more of their assets in a measured way.
The complexity of tax rules and the growing number of families facing IHT bills in the years to come mean for many a choice between paying for expensive advice or making a costly mistake.
However, tax experts point out that many older people simply don’t want to leave the homes, gardens and communities in which they have spent most of their lives. You may view their property as an inheritance tax, but it will always be home to them.
Claer Barrett is the consumer editor of the FT and the author of ‘What they don’t teach you about money‘. claer.barrett@ft.com Instagram @Claerb
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