The main asset which potentially creates an inheritance tax liability in an individual’s death estate is the main residence.
If the main residence is left to a UK domiciled spouse in the death estate, it will be completely tax free and covered by the interspousal exemption.
Alternatively, if the main residence is left to a direct descendant as part of the death estate (children or grandchildren), a residence nil rate band of £175,000 is available.
This RNRB is deducted from the death estate before the normal NRB.
Only one RNRB is available as long as the property was occupied at some point during the life as a main residence.
There is no requirement for the beneficiary to occupy the property after inheriting it.
If the property is given away during the lifetime, no RNRB is available.
A client could give away the main residence and reserve the right to live in it. This is called a gift with reservation (GWR).
Thus creates an initial potentially exempt transfer based on the market value at the date of the gift. This PET is taxable at 40% if the donor dies within 7 years of the gift.
As the donor is enjoying the benefits of ownership despite relinquishing the legal title to the property, the property is included in the donor’s death estate based on the market value at death.
To avoid double taxation, the donee only pays the higher of lifetime tax and tax based on the death estate.
To avoid the GWR rule, the donor must pay market rent for occupying the property. However, this will create an income tax liability for the donee.
Incidental occupation by the donor of the property such as taking a holiday of not more than 30 days, babysitting or convalescence will be ignored by HMRC, and the property will not be treated as a GWR.
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