Mark McLaughlin looks at the inheritance tax consequences of gifting the family home to adult offspring.
It is not uncommon for an elderly parent (usually widowed) to make a lifetime gift of their home to adult offspring. This may be done for non-tax reasons (e.g., in the hope of sheltering against future care home costs; specialist advice would be needed on this point), or to reduce exposure to inheritance tax (IHT) on their death estate.
Passing it on
In the latter case, the parent will be hoping to survive at least seven years from making the gift, so that the gift becomes an exempt transfer for IHT purposes. Circumstances vary, but typical situations include where the parent:
(a) gifts an interest in the home (e.g., an equal share) to the adult child, who co-occupies with the parent;
(b) gifts their home to the adult child, who co-occupies;
(c) gifts an equal share of their home, but the child lives elsewhere;
(d) gifts their home, but the child lives elsewhere.
A separate article could be written on each of these scenarios, but this article focuses on scenario (a).
What’s the problem?
A possible pitfall in gifting an interest in the home to a co-occupying adult child is the ‘gifts with reservation’ (GWR) IHT anti-avoidance rules. Those rules are broadly designed to prevent ‘cake and eat it’ situations, where someone gives away an asset in the hope of surviving at least seven years so that the gift becomes exempt from IHT whilst the donor continues to have the use or enjoyment of the asset during all or part of that period.
If ‘caught’ by the GWR rules, the gifted asset is treated as forming part of the individual’s death estate for IHT purposes. However, the GWR charge is subject to various exclusions and exceptions.
Escape from GWR
Are there any possible let-outs from a GWR charge in scenario (a)? Thankfully, there is an exception that can apply where (for example) the parent gifts an interest in their home to an adult child, who co-occupies the residence.
This statutory exception applies to the gift of ‘an undivided share of an interest in land’ where ‘the donor and donee occupy the land, and the donor does not receive any benefit, other than a negligible one, which is provided by or at the expense of the donee for some reason connected with the gift’ (FA 1986, s 102B(4)).
Returning to scenario (a), this means that if the parent gifts an interest in their home to (say) their adult son, and shares the property outgoings, there should be no GWR. There should be documentary evidence of the change of ownership (e.g., a declaration of trust stating their respective ‘tenant-in-common’ shares), and the son’s name should be added to the property deeds. It is important that the son does not contribute towards the parent’s share of the household running costs; but there is nothing to stop the parent continuing to pay all the household running costs.
In addition to this exception from a GWR charge for IHT purposes, there is an exemption from a ‘pre-owned assets’ income tax charge in circumstances such as scenario (a) (FA 2004, Sch 15, para 11(5)(c)).
Practical tip
Consideration should also be given to whether any IHT ‘residence nil-rate band’ could be made available on the deceased’s death under the ‘downsizing’ provisions (in IHTA 1984, s 8FB).
