Giving It All Away ? – Why Gifting Your Home to Your Children May Not Be Such A Good Idea
When considering the impending burden of inheritance tax and the cost of care, many parents feel that giving their home to their children could be a very attractive option. Their plan is to continue to live in the home, but pass the legal ownership to their children. Then, if they are required to meet the cost of their care, or if inheritance tax is due on their estate after death, they would have dispensed with the ownership of their biggest asset. Therefore, no claim can be made on their wealth. In addition, they could live, at no additional cost, in their home and their children would receive their rightful inheritance, perhaps a little sooner than they expected.
There are perhaps two very good reasons why this plan might not be a very good idea. Firstly, in gifting your home to another person you lose the element of control. You may be on very good terms with your children at the moment, but relationships can change, or their circumstances might take a turn for the worse (e.g. bankruptcy, divorce) – which might leave you homeless.
Secondly, local authorities (who pay for the majority of adult care) and HMRC may conclude that you have deliberately deprived yourself of an asset, in order to evade paying tax or care costs. In the case of Inheritance tax, it is perfectly legitimate to give away your property before you die to reduce the tax burden. You must then survive seven years after the gift has been made or inheritance tax must still be paid, although the tax decreases with every passing year (taper relief). However, if you continue to live in the property without paying a market rent HMRC will act as if the gift was never made. Inheritance tax will have to be paid in full when you die (with no taper relief) and concessions towards the payment of capital gains tax, normally passed from parents to children, will be lost.
In terms of transferring assets to avoid care costs, it’s illegal and local authorities have the power to include gifted property in their means test for care funding, especially if it’s been given away six months before care is required. The new owners of your home may be asked to pay your care costs
There is no fool proof way to totally avoid care costs and inheritance tax. However, one potential solution to mitigate these costs is to make a will and place your biggest asset (often your home) in a trust, a process that will be covered in more detail in our next blog post.
[Note: the content of this blog applies to England and Wales only, as other jurisdictions have different laws and legal processes. In addition, this blog is not a substitute for personalised advice by a professional adviser.]