For most people, their home is their most valuable asset. With the average house price in Buckinghamshire topping £520,000 (and higher in London) it is unsurprising that people often consider giving away their homes during their lifetimes to reduce their inheritance tax liability.
There are however some very real risks with gifting your home away and, in many cases, such gifts are still ineffective for inheritance tax purposes. The ongoing feud between Norma Gibbons and her daughter Dawn serves as a cautionary tale of how disastrously wrong things can go.
In this case, Norma lived in a flat above Dawn, who owned the flat directly below in a converted house. To mitigate her inheritance tax liability, and in the belief that she could remain in the flat for the rest of her life, Norma transferred ownership of her flat to Dawn. When their relationship broke down (and after several intervening events) Dawn sought possession of the upstairs flat and to evict Norma. This raises a few points about gifting property which are often misunderstood:
When an asset is signed over to another person, it becomes their property (unless subject to a trust) and so they are entitled to seek possession, to the exclusion of the former owner. Similarly, if the new owner were to go bankrupt or find themselves in matrimonial difficulties, that property is within the pot of assets available for distribution between creditors or a former spouse.
In terms of inheritance tax planning, for a gift to be effective, the person needs to give up any benefit they received from that asset. In terms of your home this can be very difficult to do and will require you to pay your child a full market rent for as long as you remain in occupation. If you do not, the gift will be treated as a gift with a reservation of benefit and the value will be included in your estate for inheritance tax in any case. This can get a lot messier if the gift was made into a trust (rather than to a child outright which is itself problematic). If the property has been gifted to a trust during your lifetime then your estate may no longer qualify for the residential nil rate band allowance, meaning inheritance tax can become payable where there would otherwise have been allowances to cover the potential liability.
If your home is gifted away in order to avoid it being used to pay for costs of care then this amounts to benefit fraud. The Local Authority have the ability to look back on gifts that have been made (particularly of large assets) and can take the value of those assets into account when assessing your ability to fund the cost of your care. In a worst case scenario this can result in you being assessed as qualifying for no support but having parted with the asset which would allow you to pay your care costs.
If you gift a property to a child who does not live in that property then it will not qualify for principal residence relief for capital gains tax purposes. This means that, when they sell the property at a later date (or gift it to their own children) it will be subject to capital gains tax. If they own their own home then this will be at the higher rates payable on second properties.
Ultimately there very few circumstances in which it is appropriate to gift your home away during your lifetime. There are other, much less risky ways to mitigate inheritance tax and, ultimately, there is more to life than tax!
If you would like to discuss any your inheritance tax position, or require advice regarding lifetime gifting then please contact Ashley Minott on 01494 893518 or by email.