The new rules undoubtedly make effective tax planning with the family home more difficult. However they do not rule it out altogether and the ideas we mention below may be appropriate depending on your circumstances.
Sharing arrangements
Where a share of your family home is given to a family member (say an adult child) who lives with you, both IHT and the POA charge can be avoided. The expenses of the property should be shared. This course of action is only suitable where the sharing is likely to be long term and there are not other family members who would be compromised by the making of the gift.
Equity release schemes
Equity release schemes whereby you sell all or part of your home to a commercial company or bank have been popular in recent years. Such a transaction is not caught by the POA rules.
If the sale is to a family member, a sale of the whole property is outside the POA rules but the sale of only a part is caught if the sale is on or after 7 March 2005.
The cash you receive under such a scheme will be part of your IHT estate but you may be able to give this away later.
Wills
Wills are not affected by the new regime and so it is more important than ever to ensure you have a tax-efficient Will.
Consider Mr and Mrs Smith. They both have assets worth £275,000 made up of the family home in which each of them owns a half share and various investments. Mr Smith dies first and leaves everything to his wife. There will be no inheritance tax to pay at this stage because gifts between spouses are exempt. Mrs Smith dies two years later worth £550,000. Her estate passes to the children and the inheritance tax payable at current rates amounts to £110,000. The liability arises because Mr Smith’s ‘nil rate band’ of £275,000 was not used on his death.
There is a way of leaving all of your wealth directly to a spouse on death which still enables use of the £275,000 nil rate band. It can be done by each spouse writing a tax efficient Will including a discretionary Will trust with a ‘debt-charge’ arrangement. Such a Will is sometimes referred to as a Loan Plan Will. In essence the plan works by leaving everything to the surviving spouse as before but in addition leaving £275,000, typically in the form of a charge on the house, to a discretionary trust. On the death of the first spouse there is no inheritance tax liability. On the death of the second spouse, his or her estate is reduced by the £275,000 owed to the trust. Such an arrangement for Mr and Mrs Smith would save the whole £110,000 inheritance tax liability. The children then inherit everything free of tax when Mrs Smith dies but she has had use of all the assets without restriction during her lifetime.