05 Aug Gifting your home – Traps for the Unwary

For the majority of people their home is the most valuable thing they own. There are several reasons why someone may think about giving away their home, but there are two main reasons people give :-

1. They want to reduce their inheritance tax bill or

2. They want to reduce the value of their assets to mean they are more likely to qualify for funding from the local authority should they require care in the future.

The actual act of giving your home away is unbelievably simple, a signature on a transfer deed and registration at the land registry moves the title to the chosen recipient of the gift. All too easy to achieve, but the simplicity of the act in no way covers the implications and possible issues which may arise. If you are thinking about making a gift of your home you need to carefully consider what this will mean for you now and in the future. Think about the value of your home in piles of five and ten pounds notes, then imagine handing this over to someone. Suddenly it feels much more real than a signature on a piece of paper.

It is also not simply the case that once the transfer is done the problem of inheritance tax or care costs goes away.

The law regarding this area is complex and it is all too easy to fall into a trap and be unable to get out of it when it is too late. You can also, inadvertently, cause issues for the recipient of the gift too.

There are several risks which need to be carefully considered before deciding to make a gift of your home

1. The change is permanent. Once you have made a gift there is no going back to how it was before unless the person you have made the gift too agrees to give it back to you. They may not be in a position to agree to give it back, what if they have become poorly themselves and can no longer agree to give it back? What if they simply refuse to give it back?

2. Your financial security is affected. You may need your property for unexpected costs in the future.

3. You no longer have the choice as to what you do with your property nor control over what happens to it. This could leave you in a vulnerable position, and make life difficult for you.

4. Relationships and situations change. There is no guarantee that something won’t happen which changes the dynamic between you and the recipient of the gift. No-one can imagine their potential beneficiaries doing something which would cause harm to them or cause their relationship to change, but things do happen. Sometimes these things are outside of everyone’s control.

5. Your beneficiary may suffer financial difficulty and become bankrupt and the house sold to meet their liabilities even if the plan was you would be safe and secure for the rest of your life.

6. Your beneficiary may go through a divorce or separation and the house forms part of their estate on all negotiations. This again can mean the house has to be sold to meet their financial commitments.

7. Your beneficiary may also suffer Capital Gains Tax penalties when they come to sell the property.

Even if taking into account all the points above, if you decide to gift your home there is no guarantee it will achieve what you are looking to do. You could find you are taking all the risk, but getting no reward.

Depending on your circumstances and the reasoning behind why you may be thinking about gifting your property will mean there may be different things to consider.

Gifting to Reduce an Inheritance Tax Liability

1. If you can move out of your house and live somewhere else and you live for 7 years after making the gift then, irrespective of what your house was worth, the value would not be included in your estate for inheritance tax purposes. Inheritance tax rates (IHT) are currently £325,000 for each person (2021-22). If the value of your estate exceeds this figure 40% IHT is payable on the amount above £325,000. There are allowances if you are leaving your family home to children or other family members in some circumstances, and an extra property allowance of £175,000 (2021-22). This means potentially you can leave £500,000 without IHT being payable. There are also additional allowances when spouses or civil partners leave everything to each other in the event of the first death. It is important to note there are strict conditions as to how these rates apply and it is important you seek advice about your own individual circumstances.

2. If you die within 7 years of giving all or a share of your property away, this will be treated as a gift and inheritance tax could become due on all or part of the value transferred.

3. If you give your property away but want to carry on living in it, you will need to pay a market rent to the new property owner and you will need to contribute to the household bills and expenses. You will effectively be renting your own home. The income from this rental would need to be declared by the recipient of the gift.

4. If you give your house away with conditions attached to it, for example they must not sell it without your consent, or you continue to live in it after you have gifted it, this is called a Gift with Reservation of Benefit (GROB) and the asset would still be treated as part of you estate for IHT purposes. This would apply even if you survived for 7 years after making the gift.

5. You may decide to gift part of your home – a share of your property. If the recipient of the gift then moves in with you and you share the bills, then the share you have given away won’t be treated as part of your estate for IHT purposes as long as you live for seven years. However, if the recipient of the gift does not move in, the GROB rules would still apply to the share you have given away.

Gifting to Reduce the Value of Assets to try to protect against care fees

1.There are complex rules in place which govern how the Local Authority will treat gifts of property. As a general rule, if you found you needed care provision the Local Authority will undertake a financial assessment to establish how much you should pay towards the cost of care. This assessment does not only ask about current assets but looks at previously held assets as well. If the Local Authority believed you had intentionally transferred the property with the express intention to avoid paying for care this may be treated as a deliberate deprivation of assets and the value of the property would still be taken into account.

2. There is no time limit for the Local Authority (7 years does not apply here).

3. When deciding whether it was a deliberate act the Local Authority will look at three things – motive, timing and amount. What was the reason for gifting the assets, was it just to avoid care home fees? When did the gift take place? The longer time period between the gift being made and the care being required the better but this means you live with all the risks listed above for a much longer time. What was the amount of the gift and how does this fit with your other assets? For most people giving their home away would be a significant value gift.

Final thoughts

A further word of warning : transferring a property into a lifetime trust can sometimes be sold as a great way to remove assets and solve the IHT and care home question. References to severing joint tenancies in properties and holding under different ownership arrangements. We have all received the invitations issued by companies who offer this as the solution to the issue. These events are normally marketed as a seminar with expensive brochures and an even more expensive price tag. The end results are normally called Family Property Will Trusts or something similar.

While lifetime trusts can be very useful for some planning it is not generally advisable to use them for this purpose. There is a very significant risk that assets you have moved into this type of lifetime trust will be treated as being a deliberate deprivation of assets, and may achieve very little when it comes to a Local Authority assessment.

Contact Us

Before making any decision about transferring your home seek legal advice. Don’t be seduced by offers of an easy fix, if something looks like it is too good to be true, it normally is. If you need assistance talk to our specialist Wills and Probate team.