My parents are quite wealthy but almost half of their wealth comes from their lovely home which is worth nearly £600,000. Their remaining wealth provides them with an income plus acts as a nest egg in case they need care later. They are looking at ways to reduce the value of their estate to keep the Inheritance Tax (IHT) bill as low as possible, and are suggesting that they put the house in my name now so it’s outside their estate in seven years. Can we do that with them still living in the house?

Phil Beck of Smith & Pinching responds:

Mitigating a future Inheritance Tax (IHT) bill is a high priority for many families and forms a key part of the financial planning process. However, I should firstly say that the vast majority of estates that fall into a typical pattern of spouses leaving their estate to each other on the first death then leaving the value of the family home to their children or grandchildren on the second death will in fact have little or no IHT to pay. If that pattern is followed, they could benefit from a combined Nil Rate Band (where the IHT rate is 0pct) of up to £1 million.

The idea of putting their home in your name has a fundamental problem, I’m afraid. If they remain living in the property rent-free, then the house will continue to be considered as part of their estate, as a “gift with reservation of benefit”. They can potentially resolve this by paying a market rent to you while they occupy the house, but that would obviously have implications on their day-to-day budgeting and the nest egg they want to keep as a safety net for the future.

It certainly sounds like your parents would benefit from some independent financial advice to help manage any future IHT liability. Gifting is just one of a range of measures they might consider to gradually reduce the value of their combined estate. There are other options to explore: these might include, for example, the use of Lifetime Lending to free up the value tied up in the house so they have cash assets to be gifted. There are also options to manage the cost of care when the need arises, which they can factor into their planning.

We use lifetime cashflow planning to deliver projections for the value of clients’ assets over a period of time, into which we can build specific scenarios such as the need for care. This might help your parents understand the extent of their future IHT liability and how mitigation measures can change things.

Any opinions expressed do not constitute advice.

For more information, please visit www.smith-pinching.co.uk