We often receive enquiries from people who wish to transfer their property into the names of their children for various reasons such as to avoid inheritance tax, or to avoid exorbitant care home fees.
This article explores the common risks involved in transferring property, and factors to think about when considering this option.
Inheritance Tax
Whilst the idea of transferring your property to your children may seem like a great way to reduce your estate for inheritance tax, there are many things to consider. Many people are unaware of the ‘gift with a reservation of benefit’ rule, meaning that if you are gifting your property to someone and remain at the property rent-free, e.g., retaining a benefit to enjoy the use of that property during your lifetime, the value of the property will not be excluded for inheritance tax. HMRC will likely consider this as a ‘gift with a reservation of benefit’. To avoid this, you would need to pay a full market-rate rent to the new owner, which should be regularly reviewed.
Capital Gains Tax
Gifting a property can potentially trigger a CGT liability. If the property is your main residence, you may be exempt under the Private Residence relief. However, if the property is a second home or a buy-to-let property, the transfer may be subject to CGT on any increase in value from the date of purchase, to the date of disposal.
Care Home fees and means-tested benefits
If you are planning to gift your property to avoid the payment of care home fees in the future, you should be mindful that this may not always have the effect that you are considering. The local authority may complete a valuation to determine your available contribution towards care home fees. If they believe that you have gifted your property to deliberately deprive your assets for care fees, they have the discretion to still include your property in their financial assessment.
Loss of ownership and security
One of the most significant risks, is that you lose ownership of your property and therefore lose control over the property. The new owners could sell the property, re-mortgage the property or potentially evict you from the property. We unfortunately come across this situation more often that you may think.
Recipient’s financial issues/personal issues
By gifting your property to another person, the property becomes at risk to the new owner’s financial situation. If the new owner becomes bankrupt, for example, the property could be considered for sale to pay any creditors.
Likewise, if the recipient of your gift goes through a divorce, the property may be considered a matrimonial asset of theirs and could potentially be considered as part of a financial settlement.
I am considering selling my property and gifting the proceeds of sale to my children, to build an annex on their land for myself. Is this a good idea?
We come across this question often and the above risks and pitfalls apply to this same question. You will still be making a gift with a reservation of benefit, if you are not paying the full market-rate rent to your child whose property you are living at.
There is also a potential added complexity when you pass away, regarding the administration of your estate which may become increasingly difficult to finalise, especially if you have more than one child to consider.
One significant consideration is that your assets would be tied up into one child’s property. If your child then remains at the property for their lifetime, and seeks to eventually pass the property down their lineal line, the inheritance of other children you may have, will be invested within the property, which could lead to either a forced sale of the property or unwanted dispute between the family.
If you would like to discuss the above in further detail, please contact one of our Wills, Tax and Estate Administration experts who will be happy to assist.
Alternatively, if you have considered the above information and still wish to proceed with transferring your property, please contact one of our residential conveyancing experts who will be happy to assist.
