Ask the expert: We pay for our adult children to live at home. Will that result in an IHT liability?

Fidelity Personal Finance Specialist, Marianna Hunt, is here to address a common concern among parents – the fear of leaving behind a large Inheritance Tax (IHT) bill for their adult children. With the rising cost of living and the challenges of the current economic climate, it is not uncommon for adult children to continue living with their parents. However, many parents worry that this arrangement could have serious financial implications for their children in the future.

One of the main concerns for parents is the impact of Inheritance Tax on their estate. Inheritance Tax is a tax that is paid on the value of an individual’s estate after they pass away. It is currently set at 40% for estates worth over £325,000. This means that if your estate is worth more than this amount, your children could potentially be left with a hefty tax bill.

So, the question is, does having your adult children live with you increase the value of your estate and therefore, the potential Inheritance Tax bill? The answer is not a straightforward yes or no. It depends on a number of factors, including the ownership of the property and the financial arrangements between parents and children.

If the property is owned solely by the parents, then having adult children living with them will not increase the value of their estate. However, if the property is jointly owned, then the share of the property belonging to the parents will be included in their estate for Inheritance Tax purposes. This means that if the property is worth more than £325,000, the parents’ share could potentially be subject to Inheritance Tax.

Another factor to consider is the financial arrangements between parents and children. If the parents are providing financial support to their adult children, such as paying for food, utilities, and council tax, this could be seen as a gift for Inheritance Tax purposes. Gifts made within seven years of the parents’ death are subject to Inheritance Tax, so this could potentially increase the value of their estate and the Inheritance Tax bill for their children.

However, there are ways to mitigate the impact of Inheritance Tax in this situation. One option is to set up a formal rental agreement with your adult children. This means that they will be paying rent to live in the property, which can be deducted from the value of the estate for Inheritance Tax purposes. It is important to note that the rent must be at a market rate to be considered a legitimate expense.

Another option is to make use of the annual Inheritance Tax exemption. Each individual is entitled to gift up to £3,000 per tax year without it being subject to Inheritance Tax. This means that parents can gift this amount to their adult children each year, reducing the value of their estate and potential Inheritance Tax bill.

It is also worth considering setting up a trust to hold the property. This can help to protect the property from Inheritance Tax, as it will not be included in the parents’ estate. However, it is important to seek professional advice before setting up a trust, as it can have other implications, such as capital gains tax.

In conclusion, having adult children live with you does not necessarily mean that your estate will be subject to a large Inheritance Tax bill. It depends on various factors, and there are ways to mitigate the impact of Inheritance Tax. Seeking professional advice from a financial specialist, like Marianna Hunt, can help parents to understand their options and make informed decisions.

Furthermore, having adult children live with their parents can also have financial benefits for both parties. It can help to reduce living expenses for the parents and provide a more affordable living situation for the children. It can also be a great opportunity for parents to pass on their financial knowledge and help their children to save for their own future.

In conclusion, while there may be concerns about the impact of Inheritance Tax when adult children live with their parents, there are ways to manage and mitigate this potential issue. Seeking professional advice and considering the various options available can help parents to ensure that their children are not left with a large Inheritance Tax bill in the future. So, don’t let this worry hold you back from enjoying the benefits of having your adult children live with you. With the right planning and advice, it can be a positive and mutually beneficial arrangement for both parents and children.