Thinking of Giving Your Home to your Children?
If you’re thinking about transferring a house to children you should read this blog.
I am often contacted by families who are thinking of transferring their house to their children. In order for me to advise you properly it is important for me to understand why you want to do this, and look at some of the key areas in which I may be able to assist you.
First it is important that you understand the risks of transferring property into a child’s name.
The first risk is loss of control: If you transfer your property into your child’s name then you will no longer be the legal owner of the property. Therefore, if you decide that you wish to sell your property you first have to have the agreement of the new owner in order to do so. Additionally, if they wish to sell the property, they will be able to do so without your permission.
The second risk is outside parties: You must also consider the possibility that your child may have an issue of their own, for example divorce. Your son or daughter’s soon to be ex-spouse would have a legitimate claim against their estate which would also include your property. If your son or daughter had an issue with bankruptcy the property would also form part of the estate. This would potentially be claimed by any creditors seeking to realise money from their estate in order to repay monies owed to them.
The third risk is capital gains tax: This is more of an issue for your children than you but it is an issue nevertheless. Capital gains tax is charged when an asset that is classed as an investment goes up in value. If your children are not living in your property when you transfer it into their names it will be subject to capital gains tax when they come to sell it. This means that if the property increases in value after being transferred over to your children, they may then be liable to pay tax on it.
The fourth issue is avoiding residential care fees: Another common reason that clients have of wanting to transfer property to their children is to avoid having to sell their home to pay for care fees. Transferring property to your children like this does NOT protect your home. Local authorities may still assess the value of your home to pay for the care fees by arguing that you deliberately deprived yourself of the asset to avoid any possible future care fees. Many people get confused because of the seven year gifting rule for inheritance tax but there is no time limit if you’ve deprived yourself of any assets to avoid paying care costs.
Homeowners are entitled to give their home away whenever they want. If your home falls under the IHT threshold, known as the nil rate band, then there is no IHT liability. However, if your home is worth more than this amount then the person you give it to could still be liable to pay the 40% IHT charge and other tax charges.
Giving your property away is regarded as making a gift. Although there are some allowances for making gifts every year, the taxman is very particular about large gifts and has put in place a ‘seven-year rule’.
This rules means that if you make a gift outside the normal perimeters, like gifting a property, then you have to survive for seven years after doing so before it falls outside of your taxable estate. Gifts where the seven-year rule applies are known as ‘potentially exempt transfers’.
If you die within seven years of gifting then the property falls back into your estate for IHT purposes and the person who received the gift will be liable to a tax charge as well. The tax charge reduces depending on how long they have had the gift.
If you gift your home to your children and continue living in it, the tax man will view this as a gift with reservation unless you pay them a full market rent. In other words, even though you no longer own your home, it will still be deemed to be part of your estate for the inheritance tax calculation when you die.
Do you still want to give away your home?