Care home fees

One of the most common reasons that people consider gifting property is because they believe it will reduce the likelihood of paying care home fees in the future.  If the time comes when you need to consider residential care, if you have over £23,250, you are required to pay your own fees in full, known as being self-funding.

However, if you have decided to reduce the size of your estate by gifting your property, the local authority could view this as a “deliberate deprivation of assets” when it comes to reviewing your past transactions.  If they believe you have attempted to do this, they will still class your property as being a part of your estate.

Inheritance Tax considerations

Whether Inheritance Tax (IHT) will be payable upon your death is also determined by the size of your estate.  While there are many criteria as to whether IHT will be payable, generally speaking if your estate is worth less than £325,000 at the time of your death then no Inheritance Tax will be due.  So, if you gift your property to your children, you may consider that your estate will not be large enough for any IHT to be paid.

If you make this gift with this in mind, in order to avoid what is known as “a gift with reservation of benefit” you cannot continue to live in the property as you would still be retaining an interest in it and so it would still form a part of your estate for IHT purposes.

To stay in the property you would need to pay rent to your children at the full market rate or move out.  In the situation that you have made the gift of the property but you unfortunately pass away within seven years, the property would still be counted towards the value of your estate.

Consequences of the transfer of property

Upon gifting your property, you must remember that you are giving up the legal rights of owning the property.  You will therefore cease to have any legal right over what happens to it in the future; your children could sell it and you would not be entitled to any of the proceeds from the sale.  They could get divorced and the house form part of the financial settlement or, if they are declared bankrupt, it could be classed as an asset.

Alternatives to gifting property

Depending on your reasons for wishing to gift your property, there are several alternatives available to you:

• You could sell the property and gift the proceeds to your children.  The seven year rule regarding IHT would still be applicable in this situation.
• Creating a Life Interest Trust Will.  Under this type of will, both you and your spouse would hold a separate share in your property, usually 50%.  If your spouse were to pass away, under a Life Interest Trust Will, their half would be placed in the trust, securing it for your children whilst specifying that you can remain in the house for the rest of your life, or until you need to go into a care home.  This is compared to a standard will where the half of the property owned by your spouse would automatically pass to you, forming a part of your estate.

Understanding the best option for you when it comes to estate planning will be dependent on your own personal situation and family arrangements and it is always recommended that you seek appropriate legal advice if you are considering gifting property to your children.

Article written and contributed by Caroline Johnstone, Associate Solicitor at Warner Goodman LLP

DISCLAIMER: This article should not be regarded as constituting legal advice in relation to particular circumstances. It is merely a general comment on the relevant topic. If specific advice is required in connection with any of the matters covered above, please speak to Warner Goodman LLP directly