In some cultures, caring for an elderly relative is expected and the norm. Although not quite so common in the UK, most people want to avoid going into a care home and would rather live with family if they are no longer able to manage at home alone. But how many elderly people in this situation realise it could trigger an income tax charge?
Most people have heard of inheritance tax, but asking about pre-owned asset tax usually draws a blank expression, even from some accountants and legal advisers.
Obviously, taxes fund the infrastructure of our society, and some taxes and allowances are arguably designed to encourage or discourage certain action. This is certainly the case when you look at the interaction of IHT and POAT.
We have for a long time been free to give away assets during our lifetime, and if lucky enough to survive seven years, the gift will be ignored when working out if our estate must pay IHT. However, what if you make a gift but benefit from it in some way?
For instance, you are lucky enough to have a holiday home, you do not stay in it much anymore and decide to give it to your children.
Avoid falling into the trap
Ignoring capital gains tax, you may have to pay on the deemed disposal of the property, and surviving seven years to save IHT. The value would still be taken into account when you die when working out the size of your estate for IHT purposes if your children allow you to carrying on using it without you paying them a full market rent.
This is due to IHT anti-avoidance rules, which would treat this as a “gift with reservation of benefit”. From an IHT planning point of view, a failed exercise.
But what if you make a gift, do not reserve any benefit from it, and find yourself indirectly benefiting in the future? This is the trap some elderly people find themselves in, usually without even realising.
A typical scenario would be the helpful Bank of Mum and Dad giving cash to their child to part fund a property purchase. Many years pass, happily more than seven, and you think you have successfully reduced the value of your estate for IHT purposes and helped your offspring get on the housing ladder.
One day you are too old or poorly to live alone and you do not want to go into a care home. Your grateful loving child invites you to live with them. After selling your property you might even help them with some more cash, possibly for a “granny annexe”.
You have gifted cash, from which you cannot reserve a benefit for IHT purposes, and seven years has elapsed.
So far so good, but you are now benefiting from a pre-owned asset. You used to own the cash, you gave it away, you are now living in a property part funded by the cash, and POAT bites.
