Should granny and grandad move in with us?
With more than half a million three-generation households in the UK, it appears we’re returning to the living arrangements last seen in the days of Queen Victoria. And, according to family history website Ancestry.co.uk, which provided the figures, the lack of affordable housing will mean the multigenerational family home is set to become even more common over the next few years.
It’s an idea that’s got government backing, too. Cabinet ministers Sajid Javid and Jeremy Hunt have both said that more families should consider putting up their parents or grandparents. As well as making it easier to arrange both child and elder care, this set-up can enable the younger generation to buy a larger property and simplify inheritance tax planning.
But while there are plenty of positives, it’s a move that requires careful consideration. “You need to go into this with your eyes wide open,” says Stewart Stretton-Hill, senior associate at solicitor Thomas Eggar. “As well as considering the tax implications, you have to think about how it might affect your family.”
The first set of quandaries arises when you consider how to achieve a multigenerational home. This will often be dictated by wealth and space but could include the grandparents moving into their child’s house, or vice versa, or both parties selling up and buying a larger home together.
With each option there is plenty to consider. For example, when grandparents choose to sell their home and move into a child’s existing property, gifting the proceeds of the house sale can be an effective way to reduce a future inheritance tax liability. It will take seven years for these gifts to leave their estate, unless they’re able to take advantage of the inheritance tax exemptions, which include a £3,000 annual allowance.
Charlie Owen, associate partner at business, tax and charity adviser Russell New, says this approach can offer opportunities to plan ahead. “By making gifts with the money, they could reduce inheritance tax and provide support for their children,” he says. “They could also consider gifting to grandchildren to help with costs such as school and university fees, and avoid the prospect of swelling their own children’s estate from an inheritance tax point of view.”
Gifts that can't be given
The position is more complex where the grandparents give the children some money to renovate an existing property, perhaps adding a granny annexe, buying a larger property to house everyone, or buying a house together with the parents, gifting their share to the kids. The taxman will regard the money as a gift with reservation of benefit as parents will still enjoy using it, even though they will no longer own it. This introduces a number of financial problems. “The gift will remain in the grandparents’ estate unless they pay pre-owned assets tax or a market rent to the child,” explains Mr Stretton-Hill.
Unfortunately, none of these options are particularly attractive. Leaving it in the estate will mean it could bump up the grandparents’ inheritance tax liability, while paying pre-owned assets tax can negate the potential inheritance tax saving, and rent can serve to bump up a child’s income tax bill.
There is a potential let-out from the reservation of benefit rules, as Emma Haley, a senior associate at law firm Boodle Hatfield, explains: “If the parents make a gift of a share in their house to a child and they all occupy the property together, providing each owner pays their share of outgoings and expenses on the property in the correct proportions, the gifted share could be regarded as outside the parents’ estate after seven years. In particular, the parents must not receive any benefit at the child’s expense or it would be regarded as a gift
Further financial issues can crop up if a grandparent’s health deteriorates. Living together may make it easier to provide care, but sometimes it is more practical to buy in care or for them to move into a care home.
When care needs to be paid for, local authorities will look at the person’s assets to determine eligibility for financial assistance. Under the current rules, assets will need to be below £23,250 in England and Northern Ireland (£26,250 in Scotland and £24,000 in Wales) before they’ll get support.
If they still own the home, or part of it, this will be included in the assessment. There are exceptions though. Ruth Dolan, a chartered financial planner and director of Tarvos Wealth, explains: “The value of the property isn’t included in the assessment if a spouse or another relative over the age of 60 lives there. If they’re old enough, this could include the children.”
The local authority will also look to see whether the person requiring care has intentionally given away their wealth to avoid paying fees. Known as deprivation of assets, it’s perfectly within their rights to look back through years of accounts to see what someone’s done with their cash.
Catriona Lumiste, a Society of Later Life Advisers accredited adviser with Financial Care Solutions, says: “If they gave away the property or a large sum of money 20 years ago, it’s unlikely to be a problem. But a local authority will get itchy if it happened recently, especially if there were health issues – for instance a diagnosis of dementia, around that time.”
Physcial and emotional upheaval
Although it’s easy to fixate on the tax and financial aspects of moving in together, it’s also important to factor in other risks that could potentially put the family home at risk. These include divorce, where the home might need to be sold as part of the settlement; bankruptcy, where it will be regarded as an asset; and death, where an inheritance
tax liability might force a sale. Miss Haley adds: “Where the property’s jointly owned, the death of either party could mean the house needs to be sold to pay the inheritance tax. Where other assets aren’t available, it may be worth considering life assurance to cover the liability.”
It’s also important to consider the emotional aspects. Changes in living arrangements and people’s health needs can test even the closest-knit family. “Living together can lead to arguments, and if a parent’s health deteriorates this can be particularly stressful,” says Mr Stretton-Hill. “Providing care can be mentally and physically draining and can also lead to resentment if someone has to give up their career to be a carer.”
It’s not just the family members in the home that can find the new living arrangements tough emotionally. Other siblings can feel slighted and, especially where money’s involved, may feel they’ve been treated unfairly. “Think about the family politics,” says Tom Lacey, a hartered tax adviser at solicitor Moore Blatch. “The grandparents might want to give them an equal share, or make provision for them in their wills, to ensure they don’t feel disadvantaged.”
Making it work
The complexities of these situations – and the potential for things to go wrong – mean that professional advice is essential. This will ensure that all the potential issues, including care needs, death and relationship breakdowns are taken into account.
Miss Haley adds: “You need to appreciate you’re dealing with the roof over your heads and ensure it isn’t put in jeopardy. Make sure you have proper documentation and a sound understanding of all the actual and potential consequences.”
As it can be difficult to unravel these living arrangements, it is sensible to have a trial run. This can be particularly useful if you’re planning to buy together as it will highlight how much space you need.
It’s also important to make sure everyone is involved in the decision. “Make it a family discussion and include any siblings who might feel they’re being left out,” says Sarah Phillips, a partner at Thomas Eggar. “If you’re open and honest about what you’re doing and what could potentially happen in the future, you’re much less likely to have any nasty surprises.”
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.
Generally thought of as being interchangeable with insurance but isn’t. Assurance is cover for events that WILL happen but at an unspecified point in the future (such as retirement and death) and insurance covers events that MAY happen (such as fire, theft and accidents). Therefore you buy life assurance (you will die, but don’t know when) and car insurance (you may have an accident). Assurance policies are for a fixed term, with a fixed payout, and unlike life insurance have an investment aspect: as a life assurance policy increases in value, the bonuses attached to it build up. If you die during the fixed term, the policy pays out the sum assured. However, if you survive to the end of the policy, you then get the annual bonuses plus a terminal bonus.