I have lost track of the number of clients who have asked about (or who have already taken steps) to transfer their home to their children, the thought process being that the home will be their children’s anyway once they have died and so it is better to give it to them now. In a lot of cases, they believe that doing so removes the home from their estate for inheritance tax, if survived by 7 years (as it was a gift in their lifetime) and protects it from being taken into account if the client needs care later on.
This type of planning simply does not work and it is almost never appropriate to gift away your home while you are still living in it, for a number of reasons:
Firstly, once the transfer is complete, you have no further control over what your children may choose to do with the property. As a co-owner (or sole owner) they would be entitled to force a sale of the property or gift their share without your consent. As an asset in their estate, it may pass under their Will (or the intestacy rules) and would also be an asset for consideration if they were to divorce or find themselves in financial difficulties. If they did predecease you, it would be subject to inheritance tax in their estate. Many people believe that they retain control over the property, however you will have given away your legal right to the property and are essentially a licensee in your own home, placing your rights of occupation at risk.
If your child does not live with you then their share will be subject to capital gains tax when the property is eventually sold. This can be significant, particularly if they own the property in this way for a long time. If they instead inherit your home under your Will then there would be no capital gains tax implications. Moreover, if they ever wished to purchase their own property (or move home) in the future, they would be subject to higher rates of stamp duty due to their ownership of part of your home.
If your child does not live with you, then the transfer is also unlikely to be effective for inheritance tax purposes. This is because you are required to part with the enjoyment or use of items gifted. As it is your home, this can only be achieved by paying a full market rent to your child. If you do not, then the gift will be ineffective and you would be treated by HMRC as continuing to own the whole of the property for inheritance tax purposes (although for all other tax and succession purposes the gift is effective). If your child does live with you then it may be possible for you to gift a part of the property to them, without this being deemed to be a gift with a reservation of benefit, and this probably the only scenario in which I have ever recommended a gift of your home. However, even in this circumstance, the other risks explained above continue to apply although the capital gains tax complications would also be removed (as it would also be their principal private residence). This type of gift is only because you are sharing possession/ occupation and so have parted with exclusive enjoyment of the property.
Your reasons for making the transfer are also very important. If you are choosing to make the transfer to try and remove assets from your estate in case you were later assessed for care fees, you should be aware that the Local Authority can (and do) look for gifts that you have made historically which may amount to a deliberate deprivation of capital. If they deem that the gift was made to avoid care costs (in whole or part) then they will treat you as continuing to own that asset and charge for your care accordingly. This can leave you in a position where the local authority have refused to fund your care, but you also no longer own the asset to cover those care costs.
Placing my home in trust:
This could (and probably will be) a blog in its own right.
Trusts are often sold as a way of ensuring that your home passes to your family, with companies recommending that you place you home in trust to protect it from care costs or to remove the need for your children to apply for probate after your death. However, doing so can trigger charges to capital gains tax down the line and sometimes an immediate charge to inheritance tax. Discretionary trusts (which these types of trusts usually are) are subject to additional charges to inheritance tax every ten years, from the date on which they were set up, if the value of the property exceeds £325,000.
If you have continued to live in the property then this would still be a gift with a reservation of benefit (and so potentially subject to inheritance tax in your estate as well) and your estate will have lost the ability to claim the residential nil rate allowance, potentially increasing the inheritance tax payable.
Although no probate application may be required, there will be trust administration required which is much more complex. To top it all off, the local authority can still treat you as having deliberately deprived yourself of assets. This really is (in the majority of cases) the worse case scenario.
Gifting away your home during your lifetime is extremely risky estate planning, and usually only serves to create additional complications for you and your family. If you are considering gifting your home away (or have already done so) then ensure that you take specialist advice from a fully STEP qualified professional as to the tax implications and the steps that can be taken to reverse this, if necessary.
If you would like to advice on this, or alternative estate planning options, then please contact Ashley Minott on 01494 893518 or by email.