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Tip to Avoid IHT on the Family Home

Newsletter issue - February 07.

There are single people, often widows and widowers with a valuable family home that want to pass it to their children but avoid IHT in the process. Whilst they still wish to live in the house, just giving it away to their children will not help their tax position.

For example, a widow with a house worth £500K and no other assets will pay 40% IHT on the amount in excess of £285K, making a tax bill of £86K.

However, by taking out a mortgage against the house for £215K, the net equity value of the house is reduced to £285K, which means IHT can be avoided altogether by gifting the cash from the mortgage to the children. The problem with this is that the widow still needs to live for another 7 years before the cash gift becomes completely IHT exempt.

An alternative is to invest the cash into assets that may be exempt from IHT so that IHT can then be avoided without having to give the assets away. For example an investment in business assets that qualify for Business Property Relief will be exempt from IHT after owning them for just two years. Such assets include shares in private trading companies including many listed on the Alternative Investment Market (AIM).

Consideration needs to be given as to how the interest on the mortgage is serviced and this itself may be tax deductible if structured correctly with the funds used to purchase business assets.