Families moving in together could face unexpected inheritance tax liabilities

A little-known tax rule could mean that families who move in together could face unexpected tax bills.

Parents who gift their home to their children but subsequently move back in could be hit by a tax rule known as “a gift with reservation”. This is defined as a gift that is not fully given away because the donor keeps some benefit for themself.

This means that inheritance tax (IHT) will once again be charged at 40% of the value of the property. This is still the case even if the move happened after the seven-year window for gifts to qualify for IHT.

As the number of families choosing to live together increases across the UK, more of your clients could fall foul of complicated tax legislation that reduces the legacy they can leave to their beneficiaries.

As a result, there is a considerable opportunity for you to help your clients explore options beyond traditional methods. This will help to protect their legacy and ensure their beneficiaries are supported for generations to come.

Your clients could find themselves in a “gifts gone wrong” situation

Gifted assets become tax free if the gift is made at least seven years before death.

However, tax will be due if HMRC finds your client has continued to enjoy the benefit of the gift. This includes continuing to live in gifted property. This will still be the case even if the client returned to the property after the seven-year window.

Over the three tax years from 2017 to 2019, gifted properties were the most common gift to “go wrong”. These errors cost donors around £372 million in IHT over that time.

This highlights that many families are being impacted by complex tax rules that can be difficult to interpret. As an adviser, this situation gives you an opportunity to build relationships with clients. By offering practical guidance and support, you can help to save them substantial sums.

The number of multi-family households continues to rise

Figures from the Office for National Statistics show that multi-family households are the fastest-growing type of household in the UK.

These types of household grew by two-thirds from 170,000 in 1999 to 278,800 in 2020.

There are a variety of reasons why more people are choosing to move in with other families. Whether it is in an effort to afford housing, share childcare responsibilities or even care for elderly relatives.

With this trend looking set to continue, there are many families who could unwittingly be making themselves liable to unexpected Inheritance Tax payments, such as a “gift with reservation”.

An uncertain market has fuelled client desire to re-examine their financial plans

31% of Financial Planners have seen an increase in client enquiries since the outbreak of the coronavirus pandemic, according to research by Aegon.

With an uncertain market and a range of complicated tax legislations to manoeuvre, many clients are beginning to reconsider their later life plans to ensure their legacy is protected.

According to Aegon, nearly half (46%) of Financial Planners said that their clients wanted to review financial plans in light of market volatility. In addition, 48% have seen current market performance as an opportunity to invest for the future. However, 23% had concerns about locking money away.

This highlights that many clients want an Inheritance Tax solution that not only offers opportunities for capital growth. They also want to keep control over their capital. As a result, a Business Relief investment could be a more flexible option for many of your clients.

Business Relief mitigates risk and keeps your clients in control of their legacy

Giving away money during their lifetime is not an option many investors feel comfortable with. Coupled with a seven-year waiting period for qualification, this can make traditional options such as gifts a fairly daunting proposition.

In contrast, Business Relief enables qualifying assets to be passed on free from Inheritance Tax after being owned for only two years. Perhaps most importantly, this is all done in the investor’s name so there is no loss of control over capital.

Therefore, a Business Relief investment comes with greater control and flexibility than a more traditional investment to mitigate inheritance tax.

This offers an opportunity for you as an adviser. More clients are becoming motivated to reconsider their financial plans due to an uncertain market and complicated legislation. As their adviser, you can help your clients explore a range of estate planning options, such as Business Relief.

To find out more about our range of Inheritance Tax services and how they could work for your clients, click here or contact a member of the Stellar team today on 020 3195 3500.

Important Information

Stellar Asset Management Limited does not offer investment or tax advice or make recommendations regarding investments. Prospective investors should ensure that they read the brochure and fully understand the risk factors before making any investment decision. The value of investments and the income from them may fall as well as rise and is not guaranteed. No assurance or guarantee is given that any targeted returns will be achieved. Forecasts of potential future results are not a reliable indicator of actual future results.

Stellar Asset Management Limited of 20 Chapel Street, Liverpool, L3 9AG is authorised and regulated by the Financial Conduct Authority.