Updated: Mar 21
Who doesn’t want to avoid paying for their care fees or inheritance tax? Whilst there are legitimate ways to help lower your exposure, transferring your house to you children isn’t one of them. The reasons why you shouldn’t gift your home to your children are countless, below we've highlighted a few important things to consider.
1. Loss of Control
You will no longer own your property.
If you want to move, re-mortgage or make any adjustments to the house you will need the permission of your children. While the relationship you have with your children may be perfect at the moment, this could always change- especially where money is involved!
What if your Son/Daughter gets divorced or gets into money trouble? Your house may need to be sold to pay for their divorce settlement or their debts. You will then be left trying to purchase a new property with depleted funds.
For example, read the story of Neville Paull, he transferred his £650,000 property to his son. His son then asked his father and his severely disabled partner to leave, saying he 'requires the property for his own use'. The father and son ended up and in a costly court battle, which Mr Paull senior eventually won, allowing him to keep his home.
2. Inheritance tax
Most people have heard of the “7 year rule” and think that if they give their property away and then live for 7 years then the value of their property is not included in any inheritance tax calculation. However, most people are unaware of the “gift with reservation of benefit” rule.
This means that if you gift your property to your children but continue to live in it, the value of your home will still count towards your inheritance tax bill. The only way to get round this rule is to pay your children a market rate rent every month. You would probably end up paying more out in rent than you would save on your inheritance tax bill.
3. Capital Gains Tax
This is something that most families seem to overlook when they are thinking about gifting their home. Usually, the house that you live in is not subject to Capital Gains Tax because of the primary residence relief, which means that you can sell the house that you own and live in and not have to worry about Capital Gains Tax.
However, if your property is owned by your children, and they do not live in the property, then they may have some Capital Gains Tax to pay when the property is sold, either during your lifetime or after your death.
For example, you gift your property to your son in 2012. At this time the market value of the property was £220,000.
You want to sell your property in 2020, the property is now worth £300,000. The property has gone up in value by £80,000- this is your gain.
The amount of Capital Gains tax payable is dependant on how much your children earn. Basic-rate taxpayers pay 18% on gains they make when selling property, while higher and additional-rate taxpayers pay 28%.
Everyone has a tax free allowance of £12,000. This reduces the gain to £68,000.
You can also deduct reasonable expenses from the gain, like your solicitors conveyancing fee of £600.
Your gain is now £65,400.
Your son’s income is £30,000 per year, so he is a basic rate tax payer. If his income was above £50,000 then the amount of Capital Gains Tax payable would be 10% higher.
So lets do the maths:
A gain of £65,400 x 18% = £11,772.00 Capital Gains Tax to Pay
A tax that you wouldn’t need to pay if the property remained in your name.
4. Care Fees and Deliberate Deprivation
Deliberate deprivation of assets is when the local authority deems that a person has deliberately disposed of assets to increase their eligibility for local authority funding.
If your capital (savings and assets) are worth more than £23,250 (and you are in England, there are different thresholds in Scotland and Wales) you won’t be eligible for local authority funding and will have to pay for your own care.
For most people, their home is likely to be their most valuable asset. So it’s not unheard of for people to think about ‘gifting’ their property to a family member or friend when facing the financial assessment for residential care.
The rules about deliberate deprivation all centre around intention. When you made the gift, could you have reasonably known that you might need care? For example, if you fell ill, then signed your property over to a relative the following week, that would look suspiciously like ‘deliberate deprivation’.
You must ask yourself, why would I transfer my property to my child? It doesn’t help with inheritance tax and it is a risky move. The only logical explanation, from the local authorities point of view, is that you transferred the property away to avoid care fees.
There is no seven year rule and the local authority has the power to look back through all of your finances. If you refuse to give them the information they have asked for, they may refuse you funding.
For example, see the case of Mrs A, who argued that the Council should disregard Mrs C’s house in her financial assessment because she put the house in a Protective Property Trust on 24 February 2014. The Council considered this argument and rejected it, the Local Government Ombudsman found no fault in the council’s decision. This means that the value of Mrs C’s house was taken into account for her care funding.
It is clear that there are many negative consequences to transferring your home to your children, or anyone else, and that the transfer probably won’t help achieve what a saving in inheritance tax or care fees. In fact, the gift may lead to unexpected Capital Gains Tax Bill.
There are legitimate ways that you can help protect your property from care fees, such as using a Life Interest Trust in your Will.
If you want to save on inheritance tax then the best thing to do is visit an Independent Financial Advisor.
If you would like to discuss how we can help you protect against care fees please contact us to find out more.
As with most things, the sooner you start planning the better!