Families moving in together in lockdown risk triggering inheritance tax bills

Elderly people who have moved back into a property during lockdown that they have previously gifted to family members could create unexpected inheritance tax bills for their dependents, says Boodle Hatfield, the leading private wealth law firm.

Boodle Hatfield says that if a person gifted a property to their children for IHT purposes, which they moved back into during lockdown*, it could be classed as a ‘gift with reservation of benefit’ and would incur an IHT charge.

During the coronavirus outbreak some elderly parents have moved into their children’s homes, to ensure they are cared for properly during the lockdown. In some cases they may have moved out of care homes in order to avoid the risk of infection. This could be a problem if they have previously gifted that house to their children.

Boodle Hatfield explains that ‘gifts with reservation of benefit’ rules mean that a person should not retain the benefit of any assets they choose to gift, such as property or art. If, for example, they gifted a painting but continued to display it in their home, the asset would still be considered as part of their estate, and subject to IHT.

However, there are some exemptions to these rules relating to gifts with reservation of benefit. For example, if the person gifting the property is taken ill and has no choice but to move back into the property as they can no longer look after themselves. In such cases, the estate would not be liable for IHT.

The rules disregard the parents’ occupation if it results from an unforeseen change in their circumstances at a time when they have become unable to maintain themselves through old age, infirmity or otherwise, provided moving back in represents “reasonable provision” by a relative of theirs or their spouse.

The government have announced a number of relaxations in tax rules since the Covid-19 outbreak and they might be persuaded that this relief is available to deal with elderly parents moving into a former home during lockdown.

Geoffrey Todd, Partner in the Private Wealth team at Boodle Hatfield, comments: “Gifting is a tax efficient way to pass on assets, but individuals need to be careful to stay within the rules. Otherwise they could find themselves in a ‘gifts gone wrong’ situation where the purpose of giving away assets to reduce IHT has backfired.”

“Inheritance tax rules are complex and the coronavirus situation has created conditions where people might inadvertently get it wrong. Those who are planning their estate should take expert advice to help them avoid any pitfalls which could result in surprise IHT bills.”

*Stays of up to four weeks each year are permitted if the person who has been gifted the property is present. If those who have benefited from the gift are absent, then this period is reduced to two weeks.

This article first appeared in The Sunday Telegraph on 26th July 2020.