It is a common question whether to gift the family home to the children when parents approach more advanced years. Usually, the thinking behind it is to reduce Inheritance Tax liability (IHT), protect the family home against the risk of bankruptcy, and/or to reduce the value of their estate to prevent having to pay care fees in the event that they should become ill or infirm.
Provided you unconditionally own your property and it is not subject to any mortgage or other restriction preventing transfer, you are free to gift your property at any time.
For many people, the family home will make up the majority of their estate, therefore it is important that those looking to estate plan are fully aware of the potential implications of gifting property to their children, as it may not be the best answer.
Dealing with the question of care home fees first:
One of the most common questions we hear is whether a person should gift their family home to avoid care home fees. In short, no.
If you happen to become ill or infirm and need caring for in the future, you will be liable to pay the costs of your care out of your own capital if your estate value is above the self-funding limit. As at the date of writing, the self-funding limit is £23,250. The value of any property you own is taken into account when determining whether you are above or below the self-funding limit. If you are self-funding and have no liquid capital, the local authority may look to recover the costs of your care from your property (if a spouse or somebody is living there they usually will not force a sale).
It is not allowable to gift your property to somebody in an attempt to avoid self-funding of care fees. If you are already sick or become sick within 7 years of gifting your property, the local authority may look closely into the gift and seek to claw back the property if they think it has been transferred solely for the purpose of avoiding care fees. There must another genuine substantial reason.
If the property is gifted at a time when care fees are not foreseeable, then this will not be an issue, however if care home fees are foreseeable in the very near future and you are thinking about gifting your property to place you under the self-funding limit, you are likely too late.
In any event, there are lots of options and care packages available to suit people’s needs and these should be considered first.
Gifting property as a way to protect against your bankruptcy is also likely to be the same answer as above, if bankruptcy is something foreseeable to you.
By gifting a property you are putting it outside of your estate and therefore outside the reach of any trustee in bankruptcy, should you become bankrupt in future. However, if you become bankrupt, a trustee in bankruptcy can look into your past transactions and seek to have them set aside and clawed back for the purpose of settling your debts.
It is more difficult/unlikely for the trustee to be able to set aside transactions that are at an arms’ length and sold for value. However, for a gift of property this is considered a transfer at an undervalue and therefore would remain liable to be set aside by the trustee should the donor become bankrupt within 7 years of bankruptcy.
Another consideration is the fact that whilst gifting the property puts it out of your legal estate, it will then form part of the beneficiary’s estate and would be at risk in the event that the beneficiary was to become bankrupt, which could result in the property being lost entirely.
Inheritance Tax Considerations
Whether to gift your property to your children or not is a legitimate and sensible consideration for those undergoing their estate planning. By placing assets outside of your estate, they are not subject to IHT (subject to some exceptions).
In England and Wales IHT is a tax on the transfer of a deceased’s assets. Currently each person is afforded a nil rated tax band (“NRB”) which is chargeable to IHT at 0%. Currently (and until at least 2028) the NRB is up to £325,000 per person. For spouses, any unused NRB is fully transferable, meaning the potential NRB for a married couple is up to £650,000. From 6 April 2017, an additional residence nil rate band (RNRB) applies to the family home of £175,000. The RNRB can only apply up to the value of the home (i.e. if the home is worth £50,000 then £175,000 cannot be claimed on it). Put together there is potentially up to £1m fully exempt from IHT. It is essential to take advantage of the available NRB fully.
IHT will be charged on the estate’s value above the NRB at 40%. By gifting your property during your lifetime, you are potentially putting the property outside of your taxable estate which could bring it within the NRB allowance, although in doing so you are losing the RNRB allowance, so care should be taken.
There are some other exceptions to be aware of, namely:
IHT may still apply at a tapered rate (PETs)
Any gift for the purpose of IHT would be taken as a potentially exempt transfer (“PET”), meaning if you were to pass away within 7 years of the gift there will be an IHT liability at a tapered rate. The current tapered rates for PETs are:
|Years between gift and death
|less than 3
|3 to 4
|4 to 5
|5 to 6
|6 to 7
|7 or more
IHT may still apply in full if you continue to benefit from the gift (GROBs)
A GROB doesn’t sound very appealing; neither are its tax implications. A gift with reservation of a benefit (GROB) applies if you gift the property but continue to live there. In this case, the 7 year period mentioned above for PETs would not begin to run until you have stopped benefitting from the property (i.e. moved out). There are ways to prevent the effect of this from happening, such as by paying market rent to your children whilst you live at the property, but if you do this then you need to consider the cost of paying rent versus the cost of being a mortgage free home-owner with a NRB allowance when you die.
Capital Gains Tax considerations (CGT)
Perhaps one of the main considerations in whether or not to gift your home is the implication on CGT. CGT is a tax payable on the capital gain of your assets at the time when they are disposed of.
Death is an event that distinguishes CGT, meaning if you bought property a long time ago which is now worth considerably more, by leaving it in your will rather than disposing of it in your lifetime, there would be no CGT chargeable and even more notably, any capital gains there are would be distinguished at the point of death.
Gifts to a spouse during lifetime will not attract CGT, however it still rolls over from the date of original purchase, whereas death extinguishes capital gains. For example, if Mr A transfers his property to their spouse, then when the spouse sells the property CGT will be charged based on the value that Mr A first bought the property for. Whereas if Mr A leaves the property to his spouse through his will, then the spouse can gift or sell that property free from the capital gain and free from CGT. In addition to this, when gifting property to children, if the donor was to die within 7 years there could be a CGT and IHT liability.
It is therefore worthwhile doing an exercise to calculate the bigger tax of CGT v IHT.
We strongly advise you to put a will in place to give you peace of mind and it is a worthwhile exercise to take time to consider your estate planning and future.
If you want to know more, please get in touch with us today.