Inheritance tax is a concern for many people who want to ensure that their loved ones receive as much of their estate as possible. One significant asset that often comes into consideration when discussing inheritance tax is the family home. Fortunately, there are several strategies available to help minimise the inheritance tax liability on your home.
1. Utilise the Residential Nil Rate Band
The Residential Nil Rate Band (RNRB) is an additional inheritance tax allowance that applies specifically to a person’s main residence. As of the current tax year, the RNRB allows individuals to pass on a certain amount of their main residence to direct descendants tax-free.
For the tax year 2023/24, the RNRB is set at £175,000 per person. This amount is in addition to the standard nil-rate band, which is £325,000. For married couples and civil partners, it’s important to note that any unused portion of the RNRB can be transferred to the surviving spouse or partner’s estate. This can potentially double the amount of the RNRB available to the surviving spouse or partner, providing up to £350,000 in additional tax relief.
2. Consider Making Lifetime Gifts
Another way to minimise the inheritance tax liability on your home is to make lifetime gifts. By giving away your home or a share of it during your lifetime, you can reduce the value of your estate and, therefore, the potential inheritance tax liability.
However, it’s important to be aware of the seven-year rule. If you give away your home and survive for at least seven years after making the gift, it will not be included in your estate for inheritance tax purposes. However, if you pass away within seven years of making the gift, it may still be subject to inheritance tax, although the tax liability will be reduced depending on how long you survived after making the gift.
Another rule to be aware of is the ‘Gift with Reservation of Benefits’ rule. Gifting the family home without moving out of the home will almost certainly invoke the reservation of benefit provisions unless the donor pays a market rent for the home. A better solution may be to give a share of the home, and genuinely share the home with the person you have gifted part of it too.
3. Set Up a Trust
Setting up a trust can also be an effective way to minimise the inheritance tax liability on your home. By placing your home into a trust during your lifetime, you effectively remove it from your estate, reducing the value of your estate for inheritance tax purposes.
There are several types of trusts available, each with its own rules and tax implications. For example, a discretionary trust gives the trustees discretion over how the assets in the trust are distributed, while a life interest trust allows a beneficiary to benefit from the trust assets during their lifetime, with the assets passing to other beneficiaries upon their death.
But, please be aware this can be costly and requires registration of the Trust with HM Revenue & Customs along with annual reporting requirements, etc.
4. Consider Downsizing
Finally, downsizing to a less valuable property can also help to minimise the inheritance tax liability on your home. By moving to a smaller property, you can reduce the value of your estate, potentially bringing it below the inheritance tax threshold. But only if you spend or give away some of the equity released from the sale.
Alternatively, you could consider selling your home and renting instead. While this may not be suitable for everyone, it can be an effective way to release equity from your home while reducing your inheritance tax liability (as long as you spend or give away some of the equity).
Conclusion
Minimising the inheritance tax liability on your home is an important consideration for many people. By utilising the Residential Nil Rate Band, making lifetime gifts, setting up a trust, or downsizing, you can reduce the value of your estate and ensure that your loved ones receive as much of your estate as possible. However, it’s important to seek professional advice before making any decisions to ensure that you choose the right strategy for your individual circumstances.
Visit us here at The Will Centre for some Inheritance Tax Advice
