Some people may tell you they have given their home to their children to reduce their inheritance tax liability or to avoid their home being used to pay care fees. This may sound a good idea but if you are considering giving your house to your children or other family members please read on.
At Keelys we always recommend you take proper legal advice before giving your home or other assets away to ensure you fully understand the legal and tax implications.
Some of the issues you may not be aware of are:
The 7 year rule for Inheritance Tax does not apply if you retain any benefit in the property or asset you gifted. So if you continue living in the gifted property and do not pay full market rent to the new owner the gift will be regarded as a gift with a reservation of benefit (GROB) when you die. The value of the property will simply be added to the value of your estate and any Inheritance Tax will be calculated on the total amount even if it’s been more than 7 years since you gave the house away. The basic rule is that if you give something away to reduce the value of your estate you must have no more benefit or control over it whatsoever.
If you do decide to pay full commercial rent to live in your home so as to avoid the GROB rules your children will have to declare this rent and pay the appropriate income tax. If they do not already fill in a self-assessment form for income tax purposes they will have to start doing so which may also mean employing the services of an accountant.
Care Home Fees
If you need long term care within 6 months of giving your property away the Local Authority can make the recipient of the gift liable for your care charges. Even if more than 6 months have passed the Local Authority can include the value of the gifted property in testing your means if there is evidence of “deliberate deprivation of capital” i.e. the significant reason you gave your house away was to reduce your assets and increase your entitlement to financial support from the Local Authority. The Local Authority have the power to ignore the gift or apply to the Court for it to be set aside. The deprivation of capital rules are not restricted to the gifting of property and can be extended to various ways your capital may have been reduced. For more details see www.ageuk.org.uk/information-advice/care/paying-for-care/paying-for-a-care-home/deprivation-of-assets/
Capital Gains Tax
If you give your property or a share of it to someone who lives elsewhere, the main residence exemption for Capital Gains Tax will not apply to them. So when they come to sell or transfer the property, even if it’s after your death, they will have to pay Capital Gains Tax on the amount it has increased in value from the date of the gift. However, this would not apply if you still own the property when you die and simply leave it to them in your Will.
If you are declared bankrupt, any gifts you made within the last 2 years may be set aside. Even after 2 years the gift may be set aside if the Court is satisfied you made it to put the asset beyond the reach of a potential creditor.
If the person you gave your house to is subsequently declared bankrupt your property may be used to discharge their debts leaving you homeless.
What happens if you fall out with the person you gave your house to? If you no longer own it and have no legal rights of occupation they could force a sale leaving you homeless.
Charges Against the Property
What if the person you gave your house to gets divorced? As the property is theirs their spouse could make a claim on it within their divorce proceedings.
The person you give your house to could take out a mortgage on the property, with or without your knowledge. If they then fail to pay the mortgage, your property could be repossessed making you homeless.
You may want to move house in the future. The person you gave the house to will need to agree to the house being sold and the sale proceeds being used to buy another property for you. If they refuse, you may have to remain where you are because you are no longer an owner and have no right to sell your own home.
If the person you gift the house to owns another property of their own so, as a result of the gift, they are acquiring a second property Stamp Duty may become payable on the transfer of ownership.
You may wish to downsize to release capital or you may wish to take out a lifetime mortgage to release equity which you can use to fund your retirement or pay for care in your own home. Neither of these options will be available to you if you give your home away.
Death of the Recipient
If the person you gave your house to dies before you, your home will pass into their estate. If they didn’t make provision for you to continue occupying the property after their death, the beneficiaries of their estate could force a sale leaving you homeless.
If however you co-own your property with a spouse, partner or civil partner it is possible to ring fence a share of the property on the first death. This will mean that if you die first and your spouse or partner requires long term care, they can only be assessed in respect of their own share of the property and not your share; this will still be available to pass to your named beneficiaries when your spouse or partner dies.
We do not advise giving your property away, without giving the matter very careful consideration and certainly not without having the benefit of proper legal advice.
Please contact a member of our Private Client Team, Catherine Elliott, Helen Jolly or Helen Phillips for further advice.