Can We Use a Lease to Minimise IHT?

AmIBeingRobbed

I live in London where the high property prices are on the excessive side. This causes major headaches with estate planning because too much value is locked in the freehold. I am considering something along these lines:

1. Myself and my wife take out a 40-50 year lease on our house. 
2. We give the house freehold as a "Once in a Life Time Gift" to our children (which would be leased to us for the next 40-50 years.)
3. If either myself or my wife does need care, the lease could be used as security, if needed.
4. When we pass away, our children get the lease which they could cancel 

As far as I can see:

• It is probably legal but could prove inflexible if either of us needs to move to for care, sheltered accommodation or simply to downsize.
• If either of us needs care, the lease could be taken as security and/or the house could be rented to contribute towards care.  It might not be possible to use the house until any care debt is paid.
• If we wished to move, life could get complicated. One reason one or both of us might want to move is to sheltered accommodation or to downsize. In which case, we could let the house to pay for or contribute towards the cost.

Does any one have any thoughts on the legality and practicality of this solution?  The alternative is to sell and downsize which is not an attractive option.

unholyangel

You need legal advice, what you're suggesting is littered with pitfalls. You seem to have considered some of those which could potentially affect you, but you haven't mentioned any that could affect your children. So have you considered that side of things at all? This is why you need proper advice.

But before that, you need to look up gift with reservation (of benefit). 

oldbikebloke

do you intend to pay your children the market value of the lease or market rent each month?
Creating a lease does not alter the fact the freehold remains a gift with reservation of benefit. Even if you try to get more convoluted with the lease, you'd still get caught by the ultimate IHT backstop: Pre Owned Asset Tax (POAT).

POAT is purely designed to address scenarios where gifts are made but reservation of benefit "fails" because the asset has changed, in your case a lease has been created from a freehold you previously owned but continue to benefit from living in said property by virtue of a lease. POAT is only avoided by paying market rent for the entire period of your ongoing occupation.

Inheritance planning is NOT an area for DIY gimmicks - go see a professional 

[Deleted User]

As stated above the house would form part of the estate. Additionally the children would pay CGT on any future sale, not having ever lived in it.

Rather than mitigate one tax, the property could effectively be subject to two.