Currently every individual has an Inheritance Tax (IHT) allowance of £325,000. In April 2017 an additional Residential Nil Rate Band (RNRB) came into effect to give an additional £175,000 per person by the 2020/21 tax year. The RNRB is only available on the net value of a property after deducting any borrowings and will be capped at the £175,000. Additionally, the property must be left to lineal descendants and a second home will only qualify if it has been the person’s residence at some point.
One option to mitigate tax is to set up a trust and transfer the ownership of the property to the trustees to hold for the named potential beneficiaries. For instance, parents could transfer the holiday home to the trustees to hold for the potential benefit of the children at a later date and after seven years, the gift from parents to trustees is outside their estate for IHT purposes. Although the parents could not be beneficiaries of the trust (otherwise the gift fails regarding IHT), they can be the trustees and therefore retain control of when and how the children inherit.
If the value of the property gifted to the trust exceeds £650,000, a lifetime charge to IHT is triggered and therefore it may be worth considering using a company as opposed to a trust. Here, the parents retain control of the company by allocation of certain types of shares, with the children ultimately benefitting from the property once the parents decide to pass on the capital value.
Peter Norris at Hassall Law Limited is happy to assist if required: firstname.lastname@example.org or Telephone (01548) 854878