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Succession Planning: Gifting the Family Home – Considerations

For most people the family home will make up the majority of their estate, so it is important that those looking to effect sensible succession planning are fully aware of the potential implications of gifting property to their children.

Provided you unconditionally own your property and it is not subject to any mortgage, joint buyer, or other restriction preventing transfer, you are free to gift your property at any time and there can be advantages to doing this. If your property is subject to one of these things and you would like to take some advice on your options, please contact a member of our Private Client team today.

Local Authority Funding Limits:

If you happen to become ill or infirm at some point in your life and need to be cared for, you will be liable to pay the costs of that 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 (with a tariff system applied to capital over £14,250). 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 (don’t worry, if a spouse or somebody is living there other than yourself, they usually will not force a sale).

The self-funding limit is often a big consideration for those considering gifting their property, although it is not an allowable practice to gift your property away in an attempt to avoid self-funding. The local authority has the power to look into any transactions that they feel to be suspicious or designed to avoid paying care fees, and one should be aware that if a person is already sick or becomes sick within 7 years of gifting their property, the local authority may look closely into that gift and even seek to claw back the property if they think it has been transferred solely for the purpose of avoiding care fees.

Considerations:

Bankruptcy

By gifting a property you are putting it outside of your estate and therefore outside the ambit of any trustee in bankruptcy, should you become bankrupt in future. However, if you become bankrupt, a trustee in bankruptcy can look at your past gift and consider it to be a transfer at undervalue and claw back from the beneficiary for the purpose of settling debts. Of course, 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 go into bankruptcy which could result in the property being lost entirely, therefore you should ensure that whoever you gift the property to is solvent.

Inheritance Tax 

In England and Wales Inheritance Tax is a tax on the transfer of a deceased’s assets. Currently each person is afforded a nil rated tax band (“NRB”) up to £325,000 (or potentially £650,000 if coupled with any unused spousal NRB plus an additional amount for the family home), above which tax will be charged on the estate’s value at 40%. By gifting your property during your lifetime, you are putting the property outside of your taxable estate, although this is subject to exception where the Property is considered a potentially exempt transfer ("PET").

PET

Any gift for the purpose of IHT would be taken as a PET, meaning if you were to pass away within 7 years of the gifting, there may be an IHT liability at a tapered rate. The current tapered rates for PETs are:

Years between gift and death Tax paid
less than 3 40%
3 to 4 32%
4 to 5 24%
5 to 6 16%
6 to 7 8%
7 or more 0%

If you gift the property but continue to live there, this is taken as a gift with reservation of a benefit, meaning the 7 year period mentioned above, would not begin to run until you have moved out of the property. There are ways to prevent the effect of this from happening, such as by paying market rent whilst you live at the property.

Plan Today

Whilst there are advantages to gifting your property and it is advisable to plan for the future, you must be aware that by gifting your property you are giving up your ownership over it and therefore you should always seek professional legal advice before choosing to proceed.

At Ai Law our Private Client team can advise you on your options and deal with any disposal of assets, as required. Speak to us today.

This information is in no way to be taken as legal advice or tax advice. It is for information purposes only and is in no way to be relied upon. You should always seek the appropriate professional legal advice before attempting to act on any of the information given here.

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