Should I pay rent to my son?

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My husband died last year and our son, who will inherit our substantial family home, wishes to move in with his family. What are the rules around this? May I remain the owner of the house if my son lives there or does he become the sole owner and I need to pay him rent?

Owen Byrne, partner at law firm BDB Pitmans, says the fundamental point here is around inheritance tax rules: very simply, you cannot give something away yet retain the benefit. HMRC calls this “gifts with reservation of benefit” and has complex rules targeting it.

In essence, you can give some or all of the property to your son and remain living there via three routes. First, bearing in mind we are within two years of your husband’s death, you could vary your inheritance to give your son a share of the property equivalent to your husband’s nil rate band (£325,000) and residence nil rate band (£175,000) so that your son inherits a share from his father but without an IHT bill. This is not treated as a gift by you.

Second, you could just give your son a share of the property without any variation of your husband’s estate.

Third, you could give your son the whole property and pay a market rent to stay in part of it. Of course, you have to be comfortable first in becoming a tenant of your landlord son, which deters a lot of clients from considering such planning. The rent should be reviewed every two to three years.

In the first two routes there is a sharing arrangement, which gives your son the right to occupy so that arrangements are not caught by the reservation of benefit rules. You will need to take care as to the sharing of household expenses.

In the third route, you will be making a potentially exempt transfer. If you survive seven years, the value will have passed free of IHT to your son. If you die within seven years and the value is above your available nil-rate band and residence nil-rate band (and any inherited from your husband’s estate), it is taxed at 40 per cent and payable by your son. But that rate tapers down by 8 percentage points for every year you survive after three years. If you die within six to seven years of the gift, the IHT rate is just 8 per cent, so there can be an IHT saving to be had from a failed lifetime gift.

The third route only works if you have a good, dependable income. Suppose care fees hit and you wanted to be cared for at home. If paying for care and rent became tricky and you stopped paying rent, you would be considered to be reserving a benefit.

Will my business succession plan be followed?

I own a successful business in the City and I’m approaching retirement age. I am now beginning to put together a succession plan, allowing the company to survive and thrive after I have died. I want to set out on paper my visions for the future and give my successors “instructions” for where to take the business when I am no longer alive. Legally, can I do that? Would my successors be bound by those plans, or can they do what they want? 

James Broadhurst, corporate partner at law firm Charles Russell Speechlys, says a desire to control the direction of your company after you have passed away is completely understandable.  

There are steps you can take now to influence the future of your business. These will require a combination of putting in place a tailored legal framework and a softer approach involving mentoring, training and investing time with key individuals who share your vision and values. By developing their skills and entrusting them with your ethos, you can empower those individuals to continue your legacy. 

The first step will be to appoint to the board of the company people who understand your long-term goals for the business and whom you trust to implement these on your death.

There should be no doubt about what your long-term business plan is and how you see that vision being implemented on your death. You can back this up by incorporating into the constitutional documents of the company statements about your vision and values. It can also include directions as to how the company is to operate in future.  

A possible next step will be to establish a trust and transfer the shares in the company to the trust. Advice will need to be taken to ensure that there are no adverse tax consequences from such a transfer. As the trustees will have the final say about how your company is run after your death, it is important that you choose trustees who not only buy into your core values but understand, for example, your plans for the future operation of the business and how you see your successors being involved in the day-to-day running of the company.

The trustees will make judgment calls. For example, are your successors sufficiently able to be allowed to take over and run the business at the relevant time? These advisers should not only have the requisite business acumen but must fully understand your wishes including choosing your successor, determining the timing of any sale of the company or its business, or choosing who should ultimately own the shares in the company on a distribution of the assets out of trust. 

One helpful safeguard of transferring shares into trust is that, unless the contrary position is included in the trust deed, trustees must act unanimously. This ensures that one trustee cannot control the future business plan of your company alone.  

It is also worth bearing in mind that preserving your vision after your death will naturally become much harder with successive generations. Even your trustees can’t live forever (unless a corporate trustee is appointed to act, though this brings with it separate questions of control, long-term business planning and a true understanding of your company’s ethos), and so it is important to accept the unlikelihood of any business persisting forever. “Letting go” will always be necessary, at least to a degree. 

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.

Do you have a financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to money@ft.com