Commonly the question of gifting homes to children during lifetime comes up in conversation with our clients. Many people are under the impression that the best way to manage their potential care liabilities, mitigate inheritance tax and 'keep things simple' is to make a gift of the family home during lifetime.
However, we all know that nothing in life is ever that simple.
1. Care Fees
It's a controversial subject but one that many of us will need to face during our lifetime, either in regard to our relatives or even ourselves. Local Authorities have the discretion to refuse to fund care home fees where someone is found to have deliberately deprived themselves of assets and may still count the house as belonging to that person when calculating payments. An important issue is whether or not the transfer could be shown to be motivated by other reasons or because the person transferring the asset knew they were going to be in need of care.
2. Inheritance Tax
There is some confusion regarding inheritance tax and the 7 year rule with many believing that they can sign their house over to their children but continue to live in it and if they survive for 7 years, there will be no inheritance tax to pay. This is incorrect. Whilst they retain the benefit of the asset (i.e. continue to live in the house and, for example, don't pay market rate rent to the children) this is likely to be deemed as a gift with reservation of benefit (GROB) and therefore the asset would still be taken into account for IHT purposes.
3. Capital Gains Tax
An extra sting in the tail is Capital Gains Tax (CGT). The children would lose their 'private residence' exemption to would have to pay tax on any increase in the house's value between the date of the gift and when they come to sell the house. There could also be additional Stamp Duty Land Tax implications to consider. In addition, the recipient may still have to pay IHT on top when the second person dies because of the gift with reservation of benefit rule.
If the person that has been gifted the house subsequently separates from their spouse, the property could then form part of the divorce proceedings meaning the house could be sold from under the person living there.
If the person the house has been gifted to unexpectedly dies, then it will form part of their estate and not the person still residing in the house which could compromise their ability to remain in the property .
By reducing assets now, people could unintentionally but significantly reduce their lifestyle choices later on. Having worked hard to accumulate assets, it's perfectly reasonable for people to want to remain in the driving seat and there are a number of other options available rather than simply giving property away and, essentially, hoping for the best.
If you wish to make a Will or amend your Will, or you just want to better understand the options available to you then just get in touch and we will help. You can email us on firstname.lastname@example.org