One of the most common questions we are asked by clients, is if they could make a gift of their house to their children. This is quite often to mitigate any inheritance tax in the future.
One important thing to bear in mind, is that many people who are concerned about inheritance tax are not at risk of inheritance tax liability due to changes in the inheritance tax rules. Before you make any decisions in giving away any of your assets, including your house, it is important to first check your inheritance tax position. It is possible that your Estate would not be subject to inheritance tax and therefore, you would not need to consider the option of giving your property away.
Our inheritance tax calculator can be used to obtain an estimate of the potential inheritance tax liability on your death.
How is my inheritance tax liability calculated?
When making a gift to your children, of property or money, as long as you live for seven years after the date you have made the gift, inheritance tax will not be payable on the value of this gift. If you die within seven years of making the gift, it will still be included within your Estate for inheritance tax purposes and tax may still have to be paid on it. The amount of inheritance tax you will have to pay may not be the standard charge of 40% and depending on when you die within the seven years of the gift, a percentage of it may be subject to inheritance tax “known as Taper Relief”. This could result in a percentage lower than 40% being charged.
What are the risks of making a gift of my property?
Making a gift of your property, however, is not without risks. As with any gift, you must have completely given away your interest in the assets as, if you are still retaining a benefit (i.e. still living in the property) you will be deemed as still reserving an interest in this asset (known as Gift with Reservation of Benefit). If you transfer your property into the names of your children but continue to live in the property rent free, the entire value of your property will still be included for inheritance tax purposes. Therefore, to avoid this asset being included, you must pay a full fair market rate rent to your children.
In addition to ensuring that you are not reserving a benefit in your property, there are a number of other risks. In transferring your property into the names of your children, you are no longer the legal proprietor and therefore, your security in residence is at risk. Should one of your children be party to divorce proceedings, their share of your property will form part of any financial settlement and if the funds could not be raised to pay the ex-spouse, the property would need to be sold. In addition, should any of your children suffer financial difficulty, this again could put you in a vulnerable position.
If I transfer my property to my children, can I avoid paying care home fees?
Another question we are asked is, whether you avoid paying care home fees if you transfer your property into the names of your children. This is an important factor and one which must be considered. The local authority is likely to view the transferring of your property into the names of your children as a method of deliberately trying to avoid the payment of care home fees. This is known as a deliberate deprivation of assets. As a result, should the local authority consider that you have attempted to conceal this asset, they can seek an order to reverse the gift of your property to your children, and the title of the property would be put back into your name and be included in an assessment for care home funding.
It is important to seek independent legal advice when making any decisions which could put you in a vulnerable position, such as giving away your home and not being the legal owner. It is also important that all parties to the transaction receive separate legal representation, as there would also be additional risks and factors for each party to consider.
Should you be concerned about inheritance tax or any other matters and be looking to protect your property for the future, please do not hesitate to give us a call on 01279 295047 and we will be happy to assist you.