Fidelity personal finance specialist, Marianna Hunt, is on hand to help parents who are concerned that letting their adult children live at home could lead to a large IHT bill.
Q: Our adult children live in our house. We pay for all food, utilities, council tax etc, but don’t charge any rent. Is that an inheritance tax liability that should be recorded? It’s covered out of an annual withdrawal we from our Self-Invested Personal Pensions.
A: It is very generous of you to let your adult children live at home, rent and bill-free.
According to research from comparison site Compare the Market, it costs parents around £280 per month (or £3,400 per year) to have children aged 18 to 25 live at home, hardly an insignificant amount.
It would be understandably painful if that generosity were repaid with a large inheritance tax (IHT) bill upon your death. If your children were living by themselves instead and you were paying their rent and bills, that could potentially be the case.
In that instance, you might be able to avoid a bill if you were making those payments out of your surplus income, and it did not impact your current lifestyle. However, you would need to keep scrupulous records to show HM Revenue & Customs you are legitimately claiming the ‘gifting from surplus income’ IHT allowance.
In this case, they are living with you, and, for IHT purposes, that is a good thing.
Technically, your food bill, utilities, and council tax are part of your regular household expenses. If you spend, say, £500 per month more on food and utilities because you have two adult children living at home, this is simply part of your expenses, and, if £500 is the number, this would naturally reduce the value of your estate by £6,000 per year.
This is not a formal IHT gift that needs to be recorded.
It’s the same if an elderly dependent relative were living with you. If they live in the same house, any costs incurred because of their presence (higher food and utility bills, for example) simply count as part of your regular household expenditure.
Time to fly the nest?
But, if you were to try to encourage the chicks to fly the nest by giving them each, say, £50,000 for a house deposit, this does count as a gift, and it becomes relevant for IHT estate calculations.
From the date you hand over the money, the seven-year IHT clock starts ticking.
Should you live another seven years after making the gift, the amount you have gifted falls completely outside of your estate value for IHT tax calculations. But, if you die within seven years of making the gift, that £50,000 will fall back into the value of your estate for IHT purposes.
Getting the balance right between supporting your children and encouraging them to be financially independent can be hard. Some young people live at home because they simply cannot afford to rent, and others have surplus income but simply choose to spend it on other things.
You could try to cultivate good habits among your adult children by telling them they can live at home rent and bill-free so long as they contribute, say, £200 a month towards saving for a house deposit or pay an extra £200 per month into their pension.
The amount is far less than paying market-rate rent and would help to set them up financially for life.
Please remember that this is not individual tax advice. IHT is a complicated area of financial planning, so for many people it would be helpful to speak to a specialist tax adviser.