Forward thinking is rarely more important in life than when it comes to plotting your financial future.
Your money works best if you can see clearly what you’ve got, what you will need and what you might have in future.
For this reason, many people in their later years start to think about how they will handle their assets when they either can’t handle them for themselves or, ultimately, won’t need them anymore and they will be passed on to loved ones.
Usually the main asset is the home. If you own property, especially if it is no longer subject to a mortgage, it’s where the bulk of your worth will be tied up. When you die and it passes to whoever inherits from you (often your children), they can be faced with the dreaded inheritance tax. Or, if you have to go into a care setting, it could be needed to pay for that, leaving your beneficiaries with a lot less than they might have expected.
In a bid to avoid this, some people consider an oft-quoted tactic of passing on their home before they die. You can read in many places how, if you do this seven years before you pass away, there will be no inheritance tax for the recipients to pay.
There’s always a ‘but’ though, isn’t there?
Ready to rent?
As with many things connected to tax and estate planning there are pitfalls and serious considerations. For instance, you can’t just hand over the house and continue to live there for free. If you’ve given it away, you need to be paying market rent for the rest of your time there to avoid the inheritance tax being an issue. So, you’ll be giving away your home AND paying rent for it. That won’t appeal to many people.
It also raises questions for those you gift it to. They will become a landlord, effectively a small business, and will have responsibilities related to that, not least the maintenance of the property.
And while no-one likes to think about it when it comes to family, what is now a harmonious relationship might not always be so, for any number of reasons. Would you really risk being evicted from your home because you don’t have a say any more?
This is not to say such a strategy does not have a place for some people. If the person you are gifting to lives with you, you can give them a portion of the property – though you still have to survive the next seven years to avoid IHT.
This could work well if multigenerational living suits your lifestyle and theirs.
Seek inheritance advice
What is crucial to understand is that this is a complex area with pitfalls for the unwary. Good advice is essential and if you need to unlock some of the value of your home as your main asset there will be a number of ways you could consider to do it without giving it away.
Discussion about your home forms part of a bigger picture about your assets and protection for the future, in which various useful insurances could also play a part.
Talking to financial planner about your future plans and access to your assets could be the best thing you ever did, because it’s not something you can leave to chance.