I wish to buy a property to live in with my daughter and young grandson.
Once we’ve sold our existing homes, I will have approximately £500,000 to contribute and she will have about £300,000.
What is the best way to split the property ownership to ensure my daughter’s future?
My concerns are: When I die would she have to pay inheritance tax? If I have to go into a care home would she have to sell the house to pay for my care? Or would she have to pay a proportion of the value of the house?
And what would happen if she can’t pay for these things?
Is there any way of protecting her and my grandson from losing the property when I die? L.C
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This reader wants to know if they can buy a house jointly with their daughter
Harvey Dorset, of This is Money, replies: Ensuring that your loved ones benefit from your hard work after you die is something many people hope to do.
More and more people are facing inheritance tax bills on the back of frozen allowances and tax changes, and at the same time younger generations are becoming increasingly reliant on help from their parents in order to reach their life goals.
This appears to be something that you are all too aware of. However, yours is something of a tricky situation.
On one hand, you are hoping to avoid an inheritance tax bill for your daughter – but you are also concerned that she will have to sell your shared house should you need care in later life.
As discussed below, there measures that you can take that could help you to get an outcome that works for you as well as your daughter and grandson.
This is Money spoke to two financial advisers to find out what you can do to make sure that your daughter can benefit from your estate without the potential to lose her home if you go into care.
Patrick Haines, chartered financial planner at Partners Wealth Management, replies: This is an increasingly common consideration for the ‘sandwich generation’ – those responsible for both bringing up children, and caring for elderly parents.
One solution to that is to have multiple generations within the same family are owning a property together, but as you point out this gives rise to concerns about future care costs and inheritance tax.
You should certainly seek advice from a specialist property lawyer, who can advise on the different ways of owning a property with your daughter.
This is particularly important when looking to protect your family’s assets following a breakdown in relationships between your daughter and granddaughter, and any partners they may have in the future.
These are the options open to you.
Option 1: An outright gift, where you pass your planned investment of £500,000 to your daughter to purchase the property. If you survive for a period of at least seven years after the gift is made, your estate will avoid inheritance tax on the amount gifted.
However, you couldn’t live in the property in this scenario unless you paid your daughter a market rent, as that would make it a ‘gift with reservation of benefit’ and potentially taxable.
Option 2: Instead of a gift, you loan your planned investment of £500,000 to your daughter to assist with the property purchase. The gift would remain within your estate for inheritance tax purposes, but you would be able to live with your daughter or make use of the property if you wished.
Patrick Haines says the reader could consider arranging a life assurance policy
Option 3 : You retain your own direct interest in the new property by simply owning a share. You and your daughter could then live in the property as tenants in common.
There would be no inheritance tax saving, but the property value is likely to be protected from local authority care costs as there would be someone else living at the property in the event you were to go into care. In other words, your daughter could not be forced to sell the property to meet your care costs.
Under all three options, your daughter could consider an equity-release loan or mortgage in the event you went into a care home and there were no other assets available to meet care costs. You must be over 55 to take one, however, and interest can roll up rapidly, so it is vital to take expert advice before doing so.
Some or all of the equity release loan could then be repaid on your passing, using any other assets you may have within your estate.
This loan could also be used to meet any inheritance tax payable under options two and three, assuming your daughter was still needing to live at the property.
Lastly, depending on your own health status and medical history, you could consider arranging a life assurance policy, written under trust, the proceeds of which could be paid to your daughter on your passing in order to meet some or all of the inheritance tax due.
This would be a convenient solution as it would enable your daughter to continue to live at the property, without the need of arranging a loan to meet the inheritance tax due.
As a reminder, inheritance tax is only due on your estate if the value exceeds your available allowances. Typically, these are £325,000 per person as a ‘nil rate band’ and potentially an additional £175,000 per person as a maximum as a residence nil rate band.
So up to £500,000 can be free from inheritance tax per person, but certain conditions apply. You can often inherit your spouse’s allowances as well, assuming you were not divorced.
The starting point should be to seek advice from a suitably qualified lawyer and a qualified financial adviser.
Abigail Thompson, independent financial adviser at Flying Colours, replies: It’s good to see that you’re thinking ahead about protecting your daughter and grandchild while also planning for your own care and estate.
If we first look at how to own the property there are two options. You and your daughter could own the property either as joint tenants or tenants in common.
A joint tenancy means both of you own the whole property equally. If one of you dies, the other automatically inherits the entire property. However, you cannot pass your share to someone else in your will.
A tenancy in common allows you to split ownership unequally (e.g. 60-40 or 50-50). You can each leave your share to someone else in your will, such as your grandchild. This offers more control over your estate and is generally better for estate planning.
Given your goals are to protect your daughter and grandchild’s inheritance, tenancy in common may be more suitable, as it allows you to pass your share to them directly in your will.
As regards inheritance tax, everyone has a tax-free IHT allowance of £325,000, plus an additional £175,000 residence nil-rate band if a home is passed to a direct descendant. That gives a potential £500,000 exemption per person.
Abigail Thompson warns that if the reader’s capital exceeds £23,250, they will likely have to self-fund care
If you are widowed and inherited your late spouse’s estate, your allowance could be doubled to £1million. If your estate, including your share of the home, is below that, no IHT will be due but anything above £1million would be taxed at 40 per cent.
Therefore, whether or not your daughter will need to pay inheritance tax will be dependent on your wider personal circumstances, IHT allowance and asset position.
If you need residential care in the future, your assets, including property, may be assessed to determine if you should pay for your own care.
Your share of the home may be included in the financial assessment, unless a qualifying relative lives in the home, such as:
• A spouse or partner
• A child under 18
• A relative aged 60-plus or who is incapacitated
If your daughter and grandchild don’t meet these criteria, the local authority may still consider disregarding the property if they would be made homeless, but this is discretionary, not guaranteed.
If your capital exceeds £23,250, you’ll likely have to self-fund care. One option is the Deferred Payment Scheme, where the council places a charge on the property, allowing care fees to be paid later (usually upon sale of the home).
If there are insufficient liquid assets to cover care fees or IHT, your share of the property might need to be sold. HM Revenue & Customs allows IHT to be paid in instalments over 10 years – interest applies – or alternatively, executors can use a probate loan to pay IHT and repay it once the property is sold.
The good news is that there are measures you can take that afford some peace of mind and protection from IHT for your daughter and grandchild.
Life insurance written into trust might help cover IHT bills and, as mentioned, owning the property as tenants in common lets you control who inherits your share.
That said, please be aware that if gifting property, there is a ‘gift with reservation’ rule, which means that continuing to live there rent-free could result in the property still being included within your estate. Paying market rent can help avoid this.
Lastly, it’s strongly recommended to speak with a solicitor or tax adviser to ensure the ownership and estate structure meets your needs.
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