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A common question we hear of is around the gifting of homes to children during lifetime. Many are under the impression that the best way to manage their potential future care liabilities, mitigate inheritance tax and ‘keep things simple’ is to make a gift of their principle private residence during lifetime.
However, we all know that nothing in life is ever that simple and there are a number of aspects to consider:
Care fees
It’s a controversial subject but one that many people may need to face during their lifetime, either in regard to relatives or a client’s own needs. 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 motived by other reasons or because the person transferring the asset knew they were going to be in need of care.
Nearly half a million people in the UK live in a care home and around half of these fund themselves and the other half receive local authority funding (with a quarter of these paying top-ups).
The value of any assets is calculated by adding up all investments, savings and the equity from property. A property won’t be included as an asset if a husband, wife, civil partner, a close relative over the age of 60 or a dependent child or disabled relative lives with the client.
If transfer of ownership of a property is deliberately put into someone else’s name or money into someone else’s bank account to avoid paying for care, it may be seen as a deprivation of assets and the local authority could refuse to fund any care.
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 IHT 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.
Capital Gains Tax
An extra sting in the tax tail is Capital Gains Tax. The children would lose their ‘private residence’ exemption so 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.
Divorce
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.
Death
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, clients could unintentionally, but significantly, reduce their lifestyle choices later on. Having worked hard to accumulate assets, it’s perfectly reasonable for clients 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.
