Considering strategies to reduce your Inheritance Tax (IHT) obligations without losing control of your house or moving out?
A co-occupation agreement might be the perfect solution for you.
(Read Time: Approx. 4 minutes)
Topics Discussed:
- Utilising Co-occupation Agreements to mitigate Inheritance Tax on your home
- Understanding the complexities of IHT exemptions through Co-occupation
Inheritance Tax and Your Home
For many, their home is their most valuable asset, making it a significant consideration in estate planning.
Gifting your home outright to remove it from your estate might seem like a viable option, but it typically requires you to move out, which isn’t feasible for everyone.
So, how can you retain your home while reducing your IHT liability?
What is a Co-occupation Agreement?
A co-occupation agreement involves formally gifting your property to a beneficiary, such as your adult children, while continuing to live there together.
This arrangement can provide an IHT exemption on your home, provided certain conditions are met.
The core requirement is that both you and the beneficiary must genuinely occupy the property without one benefiting at the other’s expense.
However, the term ‘occupy’ is not legally defined, adding a layer of complexity.
Based on the HMRC Inheritance Tax Manual, both parties should live in the home regularly, with the beneficiary maintaining a permanent presence, such as having personal belongings or pets at the property.
Setting up the Agreement
Both the gifter and the beneficiary should live in the house for substantial parts of the year, either continuously or at regular intervals.
Personal belongings should be kept at the property, and it should be treated as their main home.
It’s crucial to draw up a detailed contract to formalise the co-occupation agreement.
An Example of IHT Exemption for Co-occupation
Scenario
Arthur, aged 66, is a retired university lecturer. He owns a property in London which he occupies as his main residence.
Arthur’s adult son, James, is a recruitment consultant. He owns his own flat in Daventry but works in London. He stays with his father at the London property during the week to avoid a long commute but returns home at the weekends.
Arthur wishes to mitigate IHT on his death, but he likes his house and does not want to downsize. He decides to transfer a 50% share of the London property to James while continuing to live there.
After the transfer, James continues to live at the London property during the week and goes home to Daventry at weekends.
Arthur and James share the capital costs of maintaining the London property, but Arthur agrees that he should pay 9/14 of the running costs (e.g., utility bills) because James is not using the property at weekends.
IHT Analysis
The transfer is a Potentially Exempt Transfer (PET) for IHT which will fall out of Arthur’s chargeable estate if he survives it by 7 years. (IHTA 1984, s 3A(4))
The transfer would also be a Gift with Reservation (GWR) but for the fact that Arthur and James both occupy the London property. (FA 1986, s 102B(4)(a))
Arthur and James have taken care to split the capital and running costs of the property according to their respective levels of ownership and occupation. This way Arthur will not be treated as having reserved any additional benefit in the 50% share he has given away. (FA 1986, s 102B(4)(b))
If James ceases to occupy the property completely, Arthur will have to pay him a market rent on his half-share to ensure that the arrangement continues to be treated favourably for IHT and does not become a GWR. (FA 1986, s 102B(3)(b))
Risks and Considerations
While a co-occupation agreement can offer significant IHT benefits, it comes with risks.
If the arrangement ends before the gifter’s death, the gift may fall back into the estate, nullifying the IHT benefits.
Furthermore, if HMRC determines that true co-occupation did not occur, you could face substantial tax liabilities, including both the IHT on the property and accrued interest for late payments.
Is a Co-occupation Agreement Right for You?
Despite the potential pitfalls, co-occupation agreements can be a valuable tool in IHT planning when executed correctly.
They require careful planning and legal advice to ensure compliance with HMRC requirements and to avoid unintended tax consequences.
Summary
Explore how a co-occupation agreement can help you manage your inheritance tax liabilities while keeping your home.
The experts at Help Me Legal, led by Saara, are here to guide you through every step of drafting a co-occupation agreement that meets all legal standards.
Don’t tackle this complex process alone—reach out to Help Me Legal today and secure your financial future with confidence.
Contact us using the form here to know more. Alternatively, call us on 01772 282768, or use our 24/7 WhatsApp line at +447816848188