Should I transfer my home to my children?

Why do people choose to gift their property?

Many people will consider transferring their family home to their children as they become older in an attempt minimise their liability to inheritance tax by reducing the size of their estate and/or in order to reduce their potential liability for care home fees, should they require such care in the future. Here, we set out some of the factors to take into account before making such a gift and some of the potential pitfalls that can ensue as a result.

Tax Considerations

Inheritance Tax (IHT)

Each person within the UK has a Nil Rate Band (NRB) of £325,000 in the current tax year (2020/21). If their estate is below this value on death, then no inheritance tax would be payable. Where the deceased is a widow, the deceased’s estate may be able to benefit from any unused NRB of the spouse that died first, resulting in a possible combined NRB of £650,000. Where the deceased had previously owned a property that they had resided in, then their estate may also benefit from the Residence Nil Rate Band (RNRB) if certain criteria are met, up to an additional £175,000 for the current tax year depending on the value of the property. Again, it may be possible to claim any unused RNRB of the spouse that died first. Where the value of an estate exceeds these thresholds, the proportion of the estate in excess would be charged to inheritance tax at a rate of 40%.

Where a person’s estate is particularly large and would be over the combined thresholds, they may wish to try to reduce the value of their estate during their lifetime by gifting assets such as property or cash. A gift made during lifetime is referred to as a ‘potentially exempt transfer (PET)’. Provided that you survive seven years or more from the date of the gift, the value of the property should not be taken into account when assessing whether inheritance tax is due.

Where the person gifting the property continues to benefit from it, the property will be considered to still form part of their estate for inheritance tax purposes and will be referred to as a ‘Gift with a Reservation of Benefit’. To prevent the gift of a property being classified as such, the person making the gift should pay rent at the going rate for that area whilst continuing to live there and pay the bills associated with their occupation.

Capital Gains Tax (CGT)

A gift of property which is not your main residence will usually result in CGT being payable on the disposal. This would be relevant to a gift of a second property used as a holiday home or a buy-to-let property. Where the gift is of the main family residence, then this would usually not attract CGT.

Income Tax

Where the property is gifted to your children and you pay rent in return, your children would be obliged to declare the income received and may have to pay income tax on such funds.

Care home fees

The Means Test

Should you require care in the future; the local council will conduct a means test to determine whether you are able to pay for your care fees yourself. At the time of writing, if your capital (i.e. savings and property) exceed £23,250 then you will likely have to contribute towards your own care fees. When conducting the means test, the local council must take into account the respective shares of each joint owner where the property is owned jointly.

When property will not be taken into account

The property will not be taken into account where only temporary or short-term care is required in a care home. Where you require indefinite care, your property will not be taken into account where it is occupied by:

• Your partner or former partner, unless they are estranged from you
• Your estranged or divorced partner if they are also a lone parent
• A relative aged 60 or above
• A disabled relative
• A child of yours aged below 18

Deliberate Deprivation of Assets

If you were to deliberately reduce the size of your capital with the intention of avoiding care home fees, for example by gifting your property, then the local authority may still be able to take account of the value of the property as part of the means test. The local authority will consider the following:

• Whether you knew or could have known that you may need care when you made the gift, and
• Whether a significant reason for the gift was to avoid paying for your care

In assessing these two questions, the local authority will take account of the timing of the gift together with other factors and personal circumstances.

Other potential problems

• Bankruptcy – your child could become bankrupt in the future. As the property would be owned by them following the gift, the property could be sold as part of the bankruptcy proceedings leaving you homeless.

• Divorce – your child may divorce their spouse in the future and may have to sell the property as part of the matrimonial proceedings, again, leaving you homeless.

• Breakdown in Relationship – your relationship with your children may break down in the future. As they would own the property, they could ask you to leave, potentially leaving you without a home.

Other options

Instead of gifting your property during your lifetime, it may be possible to create life interest trusts within your Wills where you own the property jointly with your spouse or partner. On the death of the first spouse/partner, their share of the property would be held on trust for named beneficiaries, such as your children. The surviving spouse/partner would then have a right to live at the property for the remainder of their life. If the surviving spouse/partner required care in the future, then it is likely that only their share of the property would be taken into account as part of the assessment, as the other share would be held on trust for your children.