Wills, inheritance tax and adult children living at home
You may be surprised to learn that approximately 3.3 million adult children still live in the family home, a 25% increase since records began in 1996. Most parents would hope that their children will be long established in homes of their own before their own death. If you have an adult child living in the family home, and this appears to be a long-term on-going arrangement, what, if anything, should you think about including in your Will?
The right to live in the house after your death
You may want your child to continue to live in your house after your death, or at least give them time to make alternative arrangements.
Each case will be different but if you decide to provide for your resident child, the first thing to consider is how long the child’s occupation of the house should be protected. For example, you might wish to give your child the right to occupy the home indefinitely or only for a shorter specified period.
Kate has two adult children. Her daughter, Sarah, is married and has her own home. Her son, Matthew, lives at home because of a minor physical disability which means that his earning capacity is limited compared to his sister. Kate is concerned about Matthew’s future and decides to give him the right to continue living in the house for the remainder of his lifetime, with the house passing after Matthew dies to Sarah’s children.
If, like Kate, you decide to give your child a longer term right of occupation then you will also need to think about what happens if your child ceases to live in the property. At that point will it be sold and the proceeds divided or will the child continue to be entitled to the interest on the proceeds of sale for the duration of their life?
You will also need to consider how any mortgage secured on the property will be paid off, how your child will pay for future outgoings and how they will pay any inheritance tax that may be due on your death.
By comparison, one of Keith’s three adult children, Mark, lives at home. Keith would like the house sold after his death and the proceeds divided between all three of his children. Keith feels, however, that Mark should be given time to adjust to the situation and so he includes a clause in his Will providing that Mark has the right to remain in the house for six months after Keith’s death and that during that period the house should not be sold without Mark’s consent.
An inheritance tax planning opportunity?
If you have an adult child living with you on a long term basis, it may be worth looking at whether you can reduce the amount of inheritance tax payable on your death. Gifts of the family home are beset with difficulties. In particular, the reservation of benefit rules mean that if a gift of a home is made to non-resident children, and the parent continues to live in the house without paying his or her children a full market rent, then the parent will be regarded as retaining a benefit from the gift and it will be ineffective for IHT planning purposes.
However, gifts to resident adult children, provided all the outgoings are shared in proportion to ownership, do not fall foul of the IHT reservation of benefit rules.
Margaret lives with her only daughter, Louise, who looks after her. Louise intends to continue living with her mother, and would like to do so permanently. IHT will be payable on Margaret’s death.
If Margaret gives half of the house to Louise now, as long as they divide the outgoings equally and if Margaret survives the gift by 7 years, the half of the house belonging to Louise will not form part of Margaret’s estate, potentially saving significant amounts of IHT.
Care needs to be taken, however, if Louise unexpectedly moves out, as the reservation of benefit rules will then come into play unless Margaret pays rent to Louise.
Thought also needs to be given to the fact that the half share in the house in Louise’s name will be available to her creditors if she has financial difficulties in the future, although a trust could be considered to protect against this.
Contact a Wills and inheritance tax specialist
It is important to seek expert advice before implementing any tax mitigation steps or changing your Will. If you have adult children living at home and you would like to discuss any of the points raised, please call 0800 652 8025 or contact us online. Your initial consultation is free. Our specialist solicitors are based in Birmingham, Bristol, Cardiff, London, Manchester, Southampton and Taunton are ready to discuss your case.