Clients often ask us about passing the family home down a generation. This is usually driven by an idea that it could save inheritance tax or it might be to avoid the risk of avoid care cost charges.
It is really important that independent advice is taken before going down the gifting route. This is because giving away the family home (whether outright or into trust) often does not work as a strategy. It can also create other traps for the unwary.
Here are some of the reasons why we always advise our clients to think twice about transferring their house:-
- If you continue living in the property after giving it away, inheritance tax may nevertheless continue to apply to the property at 40% on your death under the ‘ gift with reservation of benefit’ rules.
- The only way to avoid a reservation of benefit is to pay a full market rent for living in the property. This obviously creates an immediate cash-flow problem. The rent also needs to be reviewed every few years to ensure that it keeps pace with market rates. You may need to pay a surveyor to get a certificate that the rent is in line with the going rate. Also, whoever now owns the property will be liable to income tax on that rental income.
- From a capital gains tax (CGT) perspective, you will lose ‘principal private residence’ relief, which provides that no CGT is payable on a sale or other disposal of the property. When the house is sold in the future, your children may have to pay capital gains tax on the sale proceeds.
- There could be another tax disadvantage for the children receiving the gift. They will be classed as already owning an interest in residential property for Land and Business Transaction Tax purposes. If they buy another property after being made the owner of your house, they will be liable for an additional tax called the Additional Dwelling Supplement.
- It is sometimes thought that giving away property will take it out of the calculation of the contribution to the costs of care. However, if you give away assets and subsequently move into a nursing home, the local authority has very wide ranging legal powers to argue that the gifted property should be treated as “notional” capital. This means that you are assessed as if the house still belongs to you under the “deliberate deprivation” rules and its value is taken into accountant.
- Finally, it is vital to realise that the house no longer belongs to you and you have no control over what happens to it anymore. You could find that the house has to be sold if, for example, your children die before you; get divorced or are made bankrupt. There is always the risk that you might fall out with your children in the future and you could be forced out of the home that was once yours.
So, if you, or someone you know, is thinking of gifting the family home, make sure that independent legal advice is taken before any papers are signed.