House rules

The home should be where the heart is rather than an asset used '¨for tax planning purposes, says Fay Copeland

For most of my clients, the family home is their most valuable asset. And when advising on wills and estate planning I'm often asked how they can avoid inheritance tax (IHT) on the value of the home at death. With property prices on the rise again, it's an understandable concern.

Before 1999, there were many arrangements for saving IHT on the family home: home loan schemes, lease carve-outs and reversionary leases being a few. But HMRC cottoned on and, after losing a landmark case (Ingram v IRC), introduced measures to stamp its authority on the situation.

Very few opportunities now remain, but clients still tell me they've heard from friends about sophisticated schemes that defeat the taxman - and they want one too. Apparently it's a hot topic on golf courses and at dinner parties in affluent parts of the country. Sadly, conversation at the 19th hole has not kept pace with the times.

The first blow to home schemes came with the gift with reservation (GWR) rules for gifts of land, introduced by the Finance Act 1999, which caught most of the planning arrangements entered into after 18 March 1999. Some survived and enjoyed a brief period of respite, but then the pre-owned asset tax (POAT) rules were introduced in the Finance Act 2004. Now all arrangements not caught by the GWR rules are subject to the annual POAT charge.

Over the years I've seen several clients who have had historic planning arrangements for their home in place. I recall breaking the news to them in 2004 that their planning no longer worked. Some incurred the costs of unscrambling complicated arrangements and accepted that tax would have to be paid on death.

Others, bravely or stubbornly, decided to fight on. For them, the time, effort and money expended in putting these arrangements in place meant they did not want to give in and let HMRC 'win'. So they have persevered, quietly but not happily, paying their annual POAT, treating it more as a nuisance than a deterrent.

Those clients were delivered a further blow in 2011 when HMRC controversially, and without prior warning, changed its POAT guidance on home loan schemes. HMRC's current view is that home loan schemes (and variants) where owners are paying POAT are within the GWR regime so the property will still be subject to IHT on death. It's a bitter pill to swallow after nine years of POAT payments.

Uncertain future

Leading practitioners continue to oppose HMRC's change of approach - for whatever that's worth. I really feel for my clients who are in this situation. What they want, especially in later life, is certainty not anxiety. It is likely there will be a test case to resolve the situation, but I suspect that many of those affected wish they had never started along this road.

I'm afraid this is what I tend to tell clients who ask about schemes for the family home: it's best not to go there. If clients are willing to settle for simpler solutions, there are a few options. It is still effective planning to give your home away and accept a lease of it back, provided you pay a full market rent.

Co-ownership also works if clients are prepared to share occupation and running costs with the other owners. Usually this is not practical, although it could be considered with second homes. The GWR rules also provide scope for de minimis use after gifting, limiting visits to one month a year for example, which may work for family holiday homes.

The GWR rules shook up tax planning with the family home (and items in it, such as valuable paintings and furniture), and continue to plague those with historic home schemes. It pains me to say it, but my advice is to enjoy your home, not plan with it.

Fay Copeland is partner and head of private client at Wedlake Bell

She writes the regular comment on inheritance in Private Client Adviser