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In the fourth of a series of extracts adapted from his eBook 'Hutton on Estate Planning' (3rd Edition), Matthew Hutton looks at the problem with Inheritance Tax (IHT) planning involving the family home, and some possible solutions.

The Problem

The relentless rise in house prices over the last 20 years or so, albeit more recently suffering something of a reversal, is a problem not just for the first-time buyer but also for the next generation on the deaths of the older property-owning generation. This is of course especially the case if one (or more) of the children wants to carry on living in the home which may have been in the family for some generations. So, what does one do, other than simply moving out and making a gift which one survives by seven years? 

It was in response to several well-publicised successful attempts to avoid the 'Gifts With Reservation (GWR) Regime' (by making an effective gift for IHT purposes while remaining in occupation) that the Pre-Owned Asset (POA) rules were introduced from 2005/06. While there are various planning possibilities open, the overriding concern must be the taxpayer’s own security of tenure if contemplating any form of lifetime gift. There is an obvious commercial risk in making a gift of the house to the children, even if the donor manages to avoid both the GWR and POA regimes. If the children then become insolvent or embroiled in matrimonial difficulties, the house may have to be sold. Also, there is probably not much point in entering into an arrangement which might escape the rules on a technicality but which is more than likely to be attacked by HMRC later on. 

Some Solutions

The above said, there are certain well-established routes, for example:

• Giving the house away and occupying it thereafter for ‘full consideration’. This may mean either paying a rack rent on a three-year renewable lease on arm’s length terms or ‘buying a lease’ for one’s life expectancy by paying a capital sum (on part of which, the term being likely to be for less than 50 years, the recipient will have to pay a measure of Income Tax).
• Alternatively, if one of the children is sufficiently wealthy, it is possible to enter into the sort of equity release scheme one might otherwise do with a financial institution, whereby the parent sells the house to the child for full value and then buys back a lease for life (on the standard terms of a tenancy, but without having to pay rent). 
• Further, likely to be more of an option perhaps with a second or holiday home, a person could give away a share in the house and occupy it from time to time with the children, each of them paying a fair share of expenses. Such an arrangement, if properly structured, avoids both the GWR and POA regimes.  
• A person might simply sell a large house and trade down for less cash, giving away the balance (after paying off any mortgage) to the children. 

The important point in all this is obviously that relationships between the family and the extended family are happy and likely to remain so. 

One should also be aware of the Main Residence Relief from CGT. If the house or a share in the house is owned by one or more of the children who do not in fact live there, then the gain will be building up for charge on ultimate disposal by them – except perhaps in the event that they do come and live there and stay in occupation until death.

The above is an adapted extract from Hutton on Estate Planning 3rd Edition.

Hutton on Estate Planning - 3rd Edition

Established in September 2008, Hutton on Estate Planning - 3rd Edition is the ideal way for private client practitioners to keep up-to-date with developments in a fast moving world.

The electronic text will be available mid-September 2010, with the printed book ready for despatch in mid-October. Updates are made to the electronic text at least monthly and subscribers are notified by email of the changes, which are carried in the text in a second colour.

Clearly set out, with well-defined sections and paragraphs, including worked examples and tips and traps, this publication with its regular updating is the only one of its kind in the market place.

Comments made by reviewers include:

'Hutton on Estate Planning is impressive in structure and rich in content …  The Book is expertly written to a high technical level. As an author myself, I can testify that a good deal of expertise is required to deliver this degree of technical detail in such short, concise paragraphs. Comprehension is made relatively easy, and in addition the author explains often complex tax provisions very clearly and succinctly.' Mark McLaughlin, STEP Journal March 2009

'The e-Book is a well designed and useful aid which offers significant additional advantages over traditional hard copy. In a crowded market place it usefully fills a niche. I would thoroughly recommend it to the practitioner.'  Sharon McKie of McKie & Co (Advisory Services) LLP, Private Client Business January 2009

'I love the sub-title Practical Solutions to Today's Problems as this highlights the approach Matthew has adopted throughout the Book. If I were still involved in the provision of tax advice myself this is one Book I would want on my shelf. More than that I would also want to be able to access the e-Book version too.' Mark Lee, Chairman of the Tax Advice Network

Subscriptions run for 12 months from 1 October 2010, though subscriptions placed in September will secure access to the eBook as soon as it is available, anticipated to be Friday 17 September. The subscription price depends upon the number of subscribers each of which has their own password and includes a copy of the printed book. The cost of a 12-month subscription for up to 10 Users is just £199 plus VAT plus £5 p&p.
 
Have a look at http://www.hutton-estate-planning.co.uk/, including a sample chapter, and either order online or through mhutton@paston.co.uk

THE ESSENTIAL FULL DAY ESTATE PLANNING UPDATE 2010

Matthew Hutton is running, for the 9th successive year, his Estate Planning Conference in three venues over Autumn 2010.

Topics to be covered: Capital Gains Tax – Looking Forward from 22 June; Trusts; Wills and Deceased Estates; The Foreign Element; The Family Business, The Family Farm, Compliance Issues, Problem Question and Discussion; And the Rest …

With very detailed Notes, the Conference aims to be ruthlessly practical. There are two dedicated question and answer sessions during the day, with an opportunity to raise questions both in advance and at the end of each session.

With six hours of CPD on offer, attendance at this Conference will enable you to be confident of being right up-to-date in advising your clients in the light of recent developments in the legislation, case law, HMRC practice and within the professional domain.

Testimonials from the 2009 series of Conferences include:

'Valuable and comprehensive annual update which consolidates MTR updates – my first resource for knowledge' Caroline Wallace of Boyes Turner

'Very relevant issues and extremely well presented as always' Joan Usher of Grant Thornton UK LLP

'An extremely thought-provoking Conference which is excellent value for money' Robert Fearon of Robert Fearon & Co

Recommendation by Mark McLaughlin, Managing Editor, TaxationWeb

'As a delegate of Matthew Hutton's Estate Planning Conference in previous years, I have always found both the lectures and the supporting notes to be comprehensive and informative. Matthew Hutton is an accomplished and highly experienced capital taxes specialist, who these days devotes his time to writing and lecturing. His combination of in-depth knowledge and practical insight is reflected in the very high standard of his lectures. He is a very polished speaker who clearly pays close attention to the needs of his audience, and it shows through the popularity of his Conferences, which also represent excellent value for money. I have no hesitation in recommending the Estate Planning Conference to practitioners with an interest or involvement in this area'.

VENUES & DATES

EAST – Wednesday 29 September, Bedford Lodge, Newmarket CB8 7BX

WEST – Wednesday 13 October, Aztec Hotel, Almondsbury, nr Bristol BS36 1RP

LONDON – Tuesday 19 October, Bloomsbury Hotel, Great Russell Street, London WC1B 3NN

COST

£300 + VAT per delegate, subject to discounts Visit http://www.matthewhutton.co.uk/, Conferences & Seminars, Matthew Hutton Conferences, to access a brochure and to submit a request for a delegate place online. Alternatively email: mailto:mhutton@paston.co.uk or call 01508 528388 quoting TaxationWeb.