Contemplating a Living Arrangement Shift with Offspring and their Family: Potential Inheritance Tax Implications to Consider
Someone in their eighties, A.S., is pondering the tax ramifications of purchasing a home jointly with their son and his family to facilitate intergenerational living. With the help of financial advisors, they aim to navigate potential tax pitfalls and mitigate them.
Intergenerational living offers numerous advantages, such as filling the gap for working parents needing assistance and enabling families to spend quality time together. This arrangement also allows families to pool their financial resources, potentially securing a property they might not be able to afford individually.
However, tax issues may arise with joint ownership placing an impact on inheritance tax and pre-owned asset tax, as explained by the experts consulted. Firstly, Ian Dyall, head of estate planning at Evelyn Partners, highlighted the importance of becoming aware of these two taxes: inheritance tax and pre-owned asset tax (POAT), an anti-avoidance measure introduced in 2005.
Regarding inheritance tax, the experts emphasize that outright gifts given during one's lifetime should have no "reservation of benefit" and must survive for seven years before the exemption is granted. If a parent gifting a home to their child continues to reside in the property without paying a fair market rent, the value can remain in their estate, making it liable to IHT on death.
On the other hand, pre-owned asset tax applies when an individual disposes of or gifts an asset but keeps the benefit; they might face an income tax charge on the perceived value of their occupancy. However, one can avoid it by electing to have their contribution treated as a reservation of benefit or by paying a market rent.
Another crucial consideration is the residence nil rate band, an inheritance tax allowance that can be used if one leaves their home to children and grandchildren. Fortunately, 'downsizing provisions' exist, allowing people to sell their homes later in life while retaining this allowance.
Patrick Haines, partner at Partners Wealth Management, advised that proper ownership should be established to avoid tax issues, apart from potentially stamp duty. For larger estates, inheritance tax can accrue, necessitating further planning. Haines proposed the joint ownership as tenants-in-common, particularly sharing the ownership and running costs equally, with a co-ownership discount applying where the co-owner is not a spouse or civil partner.
In conclusion, families considering intergenerational living must be aware of the tax implications, such as inheritance tax and POAT, when purchasing a home jointly. Gifting property, careful ownership structuring, and using trusts can help mitigate these taxes, while engaging estate planning professionals is crucial for navigating this complex terrain.
- A.S., in their eighties, must be cognizant of tax implications, like inheritance tax and pre-owned asset tax (POAT), when purchasing a home jointly with their son and his family for intergenerational living.
- Expert financial advice suggests establishing proper ownership structures, such as joint ownership as tenants-in-common, to prevent tax issues like inheritance tax for larger estates.
- To qualify for the residence nil rate band, an inheritance tax allowance, one must leave their home to children and grandchildren and consider downsizing provisions if selling their home later in life.
- Proper utilization of ownership structuring strategies, gifting property, and employing trusts can help mitigate taxes in intergenerational living arrangements, but it's critical to engage estate planning professionals for guidance.
