How can I reduce my estate to mitigate Inheritance Tax?

Brain Training. Portrait of mature woman working at home office, writing in her notebook, using lapt

Ask the expert at Smith & Pinching about reducing your estate to mitigate Inheritance Tax liability - Credit: Getty Images/iStockphoto

I am single – I never married – with children and grandchildren. My estate is worth nearly £1 million including my house which is worth about £750,000. I am clearly looking at an Inheritance Tax bill when I die. Can I put the house in my sons’ names now so my estate is reduced?

Jeremy Woodruff, Director and Chartered Financial Planner with Smith & Pinching

Jeremy Woodruff, Director and Chartered Financial Planner with Smith & Pinching - Credit: Smith & Pinching

Jeremy Woodruff of Smith & Pinching responds:

There are two problems with this suggestion. Firstly, if you gift your house to your son now, it won’t be considered wholly outside your estate for Inheritance Tax purposes (IHT) until seven years have passed. Secondly, if you put the house into your sons’ names and continue to live in it, the gift may be considered to have “reservation of benefit” and still count as part of your estate. Reservation of benefit simply means that you continue to benefit from the asset even though it is owned by someone else.

One potential solution, which might help to reduce your overall estate, might be to put the house in your sons’ names and pay them a market rent to live in it. However, you would risk completely depleting your estate if you continued to live for many years: it could leave you with insufficient wealth to provide for your chosen lifestyle and give you limited choices if you need long-term care at some stage.

There may be other ways to release the capital in your home to allow you to make larger gifts, such as equity release, although this isn’t suitable for everyone. My feeling is that you should take a step back and look at the overall picture. You could use a range of measures to reduce your estate over time. Lifetime giving, for example, takes advantage of IHT gift exemptions. You could also potentially look at the use of trusts.

I recommend you talk with a Chartered Financial Planner to come up with a strategy to mitigate your future IHT liability. We would need to look at your other assets, what income you have and your personal circumstances – age, health, etc. – and work out how to balance a reduction in the value of your estate with your future needs.

Any opinions expressed in this article do not constitute advice. Taking out a Lifetime Mortgage will mean that the value of the estate you leave to your family when you die will be reduced. It may also affect your entitlement to any means tested benefits both now and in the future. Equity Release can be more expensive when compared to a normal residential mortgage. In addition, you will still be responsible for maintaining the property. This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration.

There will be a fee for Equity Release/mortgage advice. The precise amount will depend upon your circumstances, but we estimate that it will be a minimum of £1,100.

For more information, please visit​​​​​​​