The Death Knell for Family Home Schemes

In recent times much inheritance tax (IHT) planning has focussed on ways of removing the increasingly valuable family home from the IHT net whilst continuing to live there. The IHT regime has a set of rules commonly known as ‘gifts with reservation’ that render a gift of property ineffective for IHT if the previous owner continues to enjoy or occupy the property.

However, various schemes have been developed to get around the rules - the most recent being the ‘double trust’ or ‘home loan’ scheme. The scheme enabled individuals to remove the family home from their estate for IHT whilst continuing to live there.

The government has now moved to do something about this. However, rather than change the IHT rules they will instead (from April 2005) charge income tax on the value of the continuing benefit. In the case of a property, the charge will be based on deemed income equal to the market rent for the property. Clearly quite a hefty charge and one designed to render the home loan scheme defunct.

Although the charge is not introduced until next year it will not only catch arrangements entered into in the future but also those set up previously. Given that these may be difficult to unravel, there will be the choice to treat the property as remaining within the estate for IHT purposes rather than suffer the new charge. Something of a frying pan or fire decision!