How a Co-occupation Agreement Could Slash Your Inheritance Tax Obligations!

Looking to reduce your Inheritance Tax obligations without losing your assets? A co-occupation agreement could be perfect for you!

co-occupation agreement
Co-occupation Agreement

(4 minute read)

Inheritance Tax and Your Home

For many people, their home is their most valuable asset. This makes deciding what to do with it in your Inheritance Tax (IHT) plan difficult.

Do you gift it away so it falls out of your estate? You can, but you’d have to move out and for many that’s out of the question.

So, what can you do when you want to leave as much as you can to those you love, but also want to continue to live in your home?

You can set up an IHT Co-occupation agreement.

What is a Co-occupation Agreement?

Co-occupation is exactly what it sounds like. You formally gift your property to your beneficiary and reside occupy it together.

But despite the simple principle, this is a potential tax minefield that’s tricky to cross.

Co-occupation agreements grant you an IHT exemption on your home when you and your beneficiary both ‘occupy’ it together and you don’t benefit at the expense of the beneficiary.

This raises a question: what does it mean to ‘occupy’ a property?

There’s no full answer yet. There is no legal definition and no case law that defines the term ‘occupy’ so you should act cautiously. (Though we can infer some information from HMRCs Inheritance Tax Manual)  

To be on the safe side, both gifter and giftee should live the home regularly and the giftee should have a prominent place in the property. For example, they have furniture or a pet there permanently.

Both parties must live in the house for a significant part of the year, either for long stretches at a time or at regularly occurring intervals. Both should keep their belongings at the property and should treat the property as their main home.

You should also make sure to draw up a contract when entering into a co-occupation agreement.

Living with your future beneficiary for the rest of your life is a big commitment, so this approach to IHT planning may not be suitable for many (or even most) arrangements.

A Tax Minefield?

Although a co-occupation agreement can be excellent for some, it comes with risks.

The most obvious one being that if the arrangement ends before your death, the rules around gift giving will return. This means that you will be back where you started in terms of your IHT plan.

In this case, you will have to find a new method if you still want to include your property in your IHT plan.

But the most pressing risk comes from uncertainty surrounding ‘occupation.’ If HMRC believes that occupation didn’t occur (even written contracts can be thrown out as inaccurate to the living situation) you face a tax double-whammy.

You would owe, not just the IHT on the property, but also the legal interest accrued after failing to pay initially.

As a result, a co-occupation agreement could end up costing more.

Co-occupation Agreement: The Best Choice for You?

Although co-occupation agreements can be risky and difficult to set up and prove, they are still worth discussing. They are excellent when executed by a reliable accountant in the right circumstances.

Give us a call at 01772 788200 if you’ve been considering your IHT plan. We have years of expertise and will go over all your options so you can be confident you have the best plan for your needs.

Kind regards Ilyas