A question that many of my clients often ask is, “Can I gift/transfer my property to my children to avoid care fees?”. The simple answer is it is very rarely as straightforward as just transferring your property to your children.
There are many factors that need to be taken into consideration when making such a big decision. So I thought it would be useful to highlight some of the points to be considered when thinking about transferring your property to your children.
- Avoiding care home fees by transferring property
This is one of the more common reasons that people may consider gifting/transferring their property to their children.
It is a common myth that if you gift your property to your children (which, in most cases, will be the main asset in your estate) then this may bring your assets under the threshold for self-funding of care fees, and you will be able to rely on the Local Authority to fund your care.
It is very important to note that the Local Authority will complete thorough checks on your assets and the history of transactions of this nature. By carrying out these checks, the Local Authority could then view this kind of transaction as a “deliberate deprivation of assets”. If the Local Authority believes that the transaction has been carried out to deliberately deprive yourself of assets, they may treat you as still owning the property for the purposes of a financial assessment for care fees.
- Consequences of the transfer of property
This is one of the points which is often overlooked by clients when considering whether to transfer their property. Once you have transferred the property to your children, you will be giving up your legal rights of owning the property.
This means that should you fall out with your children you could be evicted from the property. It could also mean that other parties may have a claim against the property, for example, if your child gets divorced or is declared bankrupt, the property would be included as an asset of theirs for financial matters.
- Gifting property and tax planning
Transferring your property to your children could be a useful tax planning exercise if you are looking to minimize the Inheritance Tax payable on death. However, if you gift your property to your children and continue to reside in the property following the transaction, this may not provide any reduction in the inheritance tax payable on your death. This is because you have retained an interest in the property by continuing to reside there, and this is known as a “gift with a reservation of benefit”. This would mean that the property would still form part of your estate for Inheritance Tax purposes. Some ways you could avoid the gift becoming a gift with a reservation of benefit would be to move out of the property or pay full market rent to your children to continue living in the property.
A further point to consider is, that if you gift a property to your children which is not a gift with a reservation of benefit, you must survive a period of 7 years before the asset will no longer form part of your estate for Inheritance Tax purposes. If you do not survive a period of 7 years following the gift, the value of the gift is counted towards the value of your estate for Inheritance Tax purposes
A further tax consequence of transferring property to your children may be Capital Gains Tax. Capital Gains Tax may be payable by you if the property you are gifting to your children is not your “principal primary residence”. This means if the property being gifted is an additional property to your main residence, then you may be liable to pay Capital Gains Tax on any gain made on the property since you purchased it.
Also, if you transfer property to your children and it is not their private primary residence, when they decide to sell the property, they could be subject to Capital Gains Tax if the value of the property has increased since the date of the transfer.
Other options for gifting property to children
There are other options available, depending on the reason behind gifting the property in the first place.
These options may include selling your property and gifting the proceeds to your children, although this may not be beneficial for inheritance tax planning purposes unless you survive a period of 7 years following the gift.
Alternatively, you may wish to create a Life Interest Trust Will. This type of Will would mean that you and your spouse would hold individual shares in the property, which would usually be 50% each. In your Wills, you can then each leave your interest in the property in a trust, meaning it would be held for your children but also include a right for your spouse to remain living in the property for their lifetime.
I would advise that this is not an extensive list of all of the points that may need to be considered and it is best to seek advice based on your own personal circumstances.
If you would like to speak to someone in the Wills, Trusts & Probate team about issues relating to this article, please telephone 01642 356500/0191 2322574.
Rebecca Jordan, Solicitor, Wills, Trusts & Probate
