Inheritance Tax (IHT)
Recently, an increasing number of clients have expressed worries about the new Autumn 2024 Budget and whether they ought to pass on their assets, including their family home, to their adult children in the hope of minimising Inheritance Tax (IHT).
Many clients know that they need to wait seven years before a gift falls away from their estate for IHT purposes. But, if they gift their home and continue to live in it, be that in the whole property or part of it, the gift will not reduce the value of the estate unless they pay a market rent for living there and review it regularly. Would this be affordable?
On the recipients’ side, they will need to pay income tax on the rent received and, if they are higher or additional rate tax payers, this could be as much as 40% or 45%. In the end, the income tax paid over the years may outweigh the IHT saving.
There are other family considerations to bear in mind. What if your children faced financial difficulties, insolvency or divorce? In the latter scenario, the gift to them will form part of their matrimonial pot to be shared, ultimately, at the discretion of the Family Court.
Capital Gains Tax (CGT)
From a Capital Gains Tax (CGT) perspective, transfer of property that has always been your main residence is not usually an issue.
There are concerns that, in the new budget, CGT rates will align with the personal income tax rates. Allowances will continue to reduce. We simply do not know what the budget will bring, but transfer of investments will trigger a CGT liability if the value exceeds your personal allowance. If you are going to start a gifting strategy, you may wish to do it before 30 October, when the budget takes place.
Tax changes do not usually apply retrospectively but beating the budget does not mean you are safe. The thresholds on lifetime gifts may increase which could affect a well thought-out estate strategy.
In practice, the best planning is one that matches your family’s goals and does not leave you without a roof over your head regardless of what your children want and what Government brings. Like the savvy Dowager Countess of Grantham, take your own advice and protect your financial security.
For further information about the autumn budget and the potential impact on your estate planning, please get in touch with one of our estate planning solicitors.
