As Private Client solicitors, one question we get asked repeatedly is whether you should gift your home to your children. This question usually stems from conversations in regard to inheritance tax and/or care home fees.
Gifting your home to your children can be a great way to reduce tax liabilities and safeguard your most precious asset, however it can be a complex transaction and it does not come without risks – both the practical, legal, and tax implications of any transaction of this type must be carefully considered before taking place.
What are The Tax Implications of Gifting My Home to My Children?
As a UK resident, you are entitled to your personal tax-free inheritance tax allowance of £325,000, also known as the ‘nil-rate band’. This figure takes into account your whole estate – which is any money, investments, the valuation of any property, the valuation of possessions, and the value of any gifts made in the 7 years before death. If the value of your estate is above the ‘nil-rate band’ of £325,000, inheritance tax is normally paid at a rate of 40%, however exemptions and reliefs can apply depending on your own personal circumstances.
Have You Given Any Gifts in the Last 7 Years?
As mentioned above, the value of any gifts made in the 7 years before death is taken into consideration when valuing the tax liabilities of the estate. Firstly, if you do gift your property and die within 7 years from the date of that gift, the gift will still be counted as part of your estate for inheritance tax purposes. If you survive the 7 years from the date of giving the gift, it will not be counted as part of your estate for inheritance tax purposes. However, many clients we speak to wish to gift their property on the condition that they remain living in the property for the rest of their lives. When you gift an asset but continue to benefit from it (e.g., live in the property), this is referred to as a ‘gift with reservation of benefit’ and has different tax rules. Should you gift your home to your children and continue to live in the home, when you die, the property is deemed to have never been gifted and remained in your estate and is therefore, taxed accordingly. To avoid this tax rule, you would have to leave your home forever (as if you had sold it) or pay your children full market rate rent for the duration of your residence – if this was the case, then the normal 7-year rule discussed above would apply.
What If You Are Placed In A Care Home?
If you are placed in a care home in the future, the local authority will do a means test to work out how much you must contribute towards the cost of your care. They will consider what is held in your savings and bank accounts and your property will be included in the means test at its present market value. Currently, if your capital is above £23,250, you are likely to have to pay your care fees in full. If your capital is under £23,250 you might get some help from the local council, but you may still need to contribute towards the fees.
Many clients we speak to wish to protect their biggest asset, their family home from being sold in order to fund care home fees later on in life and therefore qualify for care fee funding, however it is not always that simple. There are risks if you intentionally gift your assets away for the purpose of lowering the value of assets which will be included in a care home fees financial assessment. The local authority will likely view this as a deliberate deprivation of assets. If a local authority concludes that it was your intention to purposefully deprive yourself of your assets in order to get financial help with care fees, they can include these assets for assessment purposes and even in certain circumstances, reclaim the gifted asset as payment for any outstanding care fees.
What Are The Other Risks of Gifting My Home to My Children?
Other risks you might not have thought of include a breakdown in relationships. You may have a good relationship with your children at present day, however unfortunately no one knows the future and family relationships do break down. You are unable to put conditions on gifting. For example, you may agree with your children that you can live in the property until you die, however you have no legal right to stay in the property and could be evicted. Once you give your property away, it is irreversible and you cannot get it back – all decisions (including mortgaging, selling, or maintaining) are made by your children who are the legal owners and if the relationship breaks down, it may mean that your interests are not protected.
Furthermore, once the property is given to your children, it becomes their own asset, whether you are living in it or not. This means that the property may be caught up in their circumstances and therefore lost as a result of being sold to satisfy divorce or bankruptcy settlements, leaving you in a complete unprotected position. It does also mean that if your child predeceases you, the asset falls within their own estate meaning that it will pass either under your child’s Will or under the Rules of Intestacy if they died without a Will. This means that the property may pass to someone who you may not wish to inherit and who ultimately has legal control of the property. Again, although this is not always a problem, this may place you in an unprotected position as they would have the legal right to evict you from the property, leaving you homeless.
As with any decision, it is important to consider all the tax and practical implications before going ahead with any transaction. If after reading the above, you do wish to proceed or if you have any other questions or queries on gifting your property, please do contact us.
Contact us
☎️ Call our Wakefield office on 01924 290 029
☎️ Call our Garforth office on 0113 246 4423
☎️ Call our Sherburn in Elmet office on 01977 350 500
☎️ Call our Mapplewell office on 01226 339 009
☎️ Call our Ossett office on 01924 586 466
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