Principal Residence Dilemma

“It is quite simple, our investments and savings are covered by our nil rate bands – the house which is our biggest non-income producing asset, can be gifted to the children and after seven years will fall outside our estates for inheritance tax.”

What could be simpler – but a straight gift of the house to children does not work for inheritance tax as it will be caught by the ‘Gift with Reservation’ rules.

The principal residence is often perceived to be an ideal asset to gift on to the children because

  • It is the most significant element of the estate
  • It is non-income producing and future occupation is secured as it will be owned by the children.

The Gift with Reservation rules catch a straightforward gift of the house to children, quite simply because a benefit is retained (continued occupation and enjoyment). As a consequence, the gift is considered a non-event for inheritance tax purposes and the value of the property is subsequently brought into charge to tax, even if the gift took place over seven years previously.

Schemes have been developed to get round the problem, but each has its own drawbacks and the Inland Revenue have made it clear that they will look closely at each scheme and will attack them if they do not comply with the current rules.