How do we avoid losing a multi-million pound home to inheritance tax?

I am writing with one of life’s most wonderful problems to have: what to do in the case of a very valuable piece of London property. 

My parents were lucky enough to buy a house in a very central part of London back in the 1970s. This was before the wild increases in London property values.

It is a very lovely house and if sold would be in the upper reaches of single digit millions. I told you it was a good problem.

London homes that could have been bought by a family of relatively ordinary means in the 1970s are now worth often multiple millions, but families still leaving there risk eventually losing them to inheritance tax (stock image).

However, having grown up in the house myself and now raising my son there with my parents still there, I wondered if we should be doing something to hedge against inheritance taking the house away from us. 

I am in favour of inheritance taxes to ensure balanced societies – not that they’re working very well in the current climate. However, at the risk of hypocrisy, I would love to keep the house in the family. 

It is our home. We aren’t cash rich by any means, but would like to continue living in our community. 

Any suggestions you might have for myself and my parents (who are now in their 70s) would be greatly appreciated. D

Stuart Thorne, a trust and estates practitioner specialising in lifetime tax planning and succession issues of Clarke Willmott LLP, replies: A good problem to have – and one capable of speedy resolution.

It sounds as though you are the only child and that your parents want you and your son to inherit their house.

For ease of calculation, let’s assume the house is mortgage-free and worth, say, £8.65million. 

If your parents do nothing they have nil rate bands totalling £650,000, but no main residence nil rate band because they are worth more than £2.7million. (The main residence allowance is reduced back for estates above £2million and falls to zero at £2.7million.)

Inheritance tax from the estate would therefore currently be £3.2million.

Stuart Thorne, specialist at Clarke Willmott, says even  such a big potential inheritance tax liability it is possible to deal with

Stuart Thorne, specialist at Clarke Willmott, says even such a big potential inheritance tax liability it is possible to deal with

Some financial advisors might suggest leaving things well alone and taking out equity release on the surviving parent’s death, but that merely funds the tax when a better approach is to minimise it.

The simple answer is for your parents to make a gift of a substantial share to you and/or your son as soon as possible. 

Then provided they survive the gift by seven years, and do not fall foul of ‘reservation of benefit’ rules, the value gifted would fall outside the taxable estate.

Clearly if four of you are living there, it would be reasonable to give a 50 per cent share (or if you have a partner there too, then a 60 per cent share).

Giving away a share also devalues the retained share, probably by around 12 per cent (HMRC will easily accept 10 per cent).

By gifting 50 per cent and living seven years the retained share could be worth £3.8million and the inheritance tax bill would be reduced from £3.2million to £1.26million.

However, you could minimise the tax bill still more efficiently.

Whilst HMRC would not be impressed by a gift of a 99 per cent share, provided occupation is (and remains) genuinely shared, and provided the donees do not pay more than their proportionate share of household outgoings, it seems likely that a gift of a 75 per cent share would be accepted and there would be no need for a rental payment to avoid reservation of benefit.

On this basis the retained share, with discount, would be around £1.9million and – even better – the estate then qualifies for the residence nil rate band, worth £350,000 of extra nil rate if a parent is alive on 6 April 2020.

The final inheritance tax bill would then be down to a much more palatable £220,000 – a total saving of almost £3million.

Wealth Check

Wealth Check is This is Money’s new series focusing on those with larger sums of money to manage or invest.

It will look at what people need to consider for lifetime savings and investment pots, inheritances, business sales and other big money life events.

As part of it, we will get professionals to answer your questions. 

If you have a question that you want answering send it to with Wealth Check in the subject field. 

Assuming your parents have a good medical report, it would be well worth investigating the cost of suitable structured seven-year term life insurance to cover potential inheritance tax if either dies within the seven-year period (taking account of taper relief, which kicks in after three years). 

It may be surprisingly affordable.

There are other advantages to this simple solution. 

No capital gains tax due to principal private residence exemption; no stamp duty land tax on a gift of mortgage-free property; no artificial structures or schemes likely to provoke HMRC and very modest legal costs.

Your parents could even retain the legal title and make the gift by way of a declaration of trust, so avoiding a Land Registry transfer and retaining control.

Should they have any reservations regarding future divorce or personal debt of a beneficiary, making you the only recipient may be preferable to them – although your own inheritance tax position may be a bigger risk.

Final advice – get on with it and start the seven-year clock ticking!

What I learnt when I wrote my will 

In this five minute guide to what you need to think about when writing your will, This is Money editor Simon Lambert explains what he discovered when he wrote his – and the things you need to consider.

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