For most of us, property is the most valuable asset we own. Whether it’s the family home, a holiday house away, or properties owned as an investment, they represent a large proportion of our personal wealth.
With property being so valuable, it is usually the determining factor in whether or not you have to pay for Residential Care in your later years, whilst also forming the bulk of your overall estate value when calculating Inheritance Tax.
Many people are therefore tempted to transfer their properties into the names of their children as they enter retirement, in an attempt to reduce care home fees and inheritance tax. Whilst this may seem like a straightforward solution, the reality is that it can often fail to have the desired effect and may actually cause greater difficulties for yourself and your family.
A common misconception is that you are completely protected by the ‘Seven Year Rule’ when giving away your property, preventing you from having to pay any inheritance tax at all after a period of seven years.
Whilst this seven year rule does exist (and offers full protection for gifting cash and assets), when it comes to property there is an important caveat. Giving a property away but continuing to live there is considered a ‘Gift with Reservation of Benefit’.
Should you wish to continue living in the property, you must pay a fair rent to the new owner (‘fair’ being based on rents charged on similar properties in the area) and continue to pay your share of the bills, all under a formal tenancy agreement drawn up by a solicitor. As ‘landlords’, the new owners of the property would also now be responsible for self-assessing and paying the income tax on the rental payments.
Should you give the property away, but continue to live there rent-free, then HM Revenue & Customs will still consider it a part of your estate when calculating inheritance tax, regardless of how much time has passed since you gave it away and paying no attention to any ‘Seven Year Rule’. This would result in no inheritance tax saving whatsoever.
Residential Care Fees
Should you require residential care and ask the local authority to pay for some or all of your care fees the local authority will carry out a full review of your assets and income. This may include investigating the circumstances of any transfers of your assets.
Unfortunately, the Local Authority may well conclude that giving away your property was a ‘deliberate deprivation of capital’, meaning that you gave away your property in an attempt to avoid paying for residential care. There is no ‘Seven Year Rule’ to protect against this, and the decision would mean that you would still be required to pay the full amount of your care costs regardless.
Whilst you may be close today, it is an unfortunate reality that families do fall out. Should the new owner of the property decide to sell the property, you could well find yourself no longer having anywhere to live. Similarly, should you give away your property and then still need to pay for care fees in the future, you would no longer have a way to afford them and would receive only the most basic care with no choice over where you are placed.
Whilst it is important to make provisions for the future, you should keep in mind that you may never actually need residential care, in which case you could find yourself giving away your property needlessly. Even taking care fees out of the equation, gifting a property has its own associated drawbacks, and can deprive you of your security as you grow older. You would not be able to use the property to raise money for example, through an Equity Release or Re-Mortgage, and would find yourself reliant on the financial stability of someone else. If you were to transfer your home to your child and they find themselves getting divorced, facing financial difficulties, or even passing away before you, then you could well find yourself losing the right to live in your own home.
Being gifted a property also has implications for the person receiving it. Giving your property to your children could create a capital gains tax problem for them. In trying to reduce inheritance tax you could well find yourself inadvertently creating an even larger tax bill for your children. The property would then be counted as being theirs for their own Inheritance Tax Band purposes, and will be taken into consideration when calculating Stamp Duty Land Tax on any future property purchases of their own they may make.
As you can see, giving away your home is not quite as straightforward a solution as it may first appear. If you are considering giving away your property, we would highly recommend speaking to one of our specialist solicitors before making any decision, who will be able to assess your particular circumstances and advise on the best way forward.