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The Family Home

The principle tax saving opportunity available to a home owner is the Capital Gains Tax (CGT) private residence exemption. A saving on income tax is no longer possible since the withdrawal of mortgage interest relief from 2000/2001 o n w a r d s . As a substantial asset clients frequently raise questions about gifts of the family home, or at least an interest in it, as part of estate planning and IHT savings on its value at death. The CGT exemption applies to a disposal by sale or gift of a property used as the donor’s own or main residence, including grounds up to half a hectare. Only certain types of property are considered to be a ‘dwelling house’ in accordance with these provisions and debate has even occurred in case law about a caravan being considered to be a dwelling. Those clients who own more than one property can elect for one to be treated as the main residence. This election needs to be made within two years of acquiring a second property; if an election is not made by the owner it will be made for them by the inspector of taxes. A married couple, or a couple in a civil partnership, can only have one main residence between them and if both parties own a property then an election must be made within two years of the marriage. Where the family home is used in estate planning the saving of IHT must be balanced with the necessity to keep a roof over the donor’s head. The most common procedure for IHT saving is to gift the property, or an interest in it, to another individual, normally a child. The property can be given to trustees and a right to reside retained by the donor but there are obvious dangers in this. If the child becomes bankrupt or divorced as the house may be taken by the child’s trustee in bankruptcy or at risk in the divorce settlement. The gift with reservation of benefit provisions contained in the Finance Act 1986 s.102 and the pre-owned assets regime present the main obstacle to estate planning using the family home. There are some exceptions to the reservation rules including the following:
• Occupation virtually to the exclusion of the donor (a gift of the home to a child followed by occasional visits will not affect IHT)
• Occupation resulting from a change of circumstances of the donor (a gift of the property which is reoccupied by the donor after a period of time due to the donor’s age or infirmity)
• Occupation for full consideration of money or money’s worth (a gift followed by continued occupation under a lease or licence will not affect IHT as long as a full rent is paid)
• Co-ownership between the parent donors and the children (a gift of a beneficial interest as a tenant in common is a PET and carries the right to occupy)

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