Part One - Why do it and
Part Two - What can go wrong?
It is suggested that there are often two main motives for parents looking to transfer ownership of their home to their children.
1. Concern over paying for care home costs in the future when, for many of us, our home is our main asset.
2. An attempt to mitigate Inheritance Tax
1. Care Costs
The family home holds a special significance. You have invested in the property and already contributed lots of tax pounds to the exchequer during your working life. The prospect of the property having to be sold to pay for your care is anathema to some.
However, before you give away your biggest asset it is important to know that the value of your home is automatically disregarded for care cost contributions if your spouse still resides there. Of course, if you both subsequently require care then the value of the property will then available for both your care cost contributions.
Before the local authority will look at your home, if you have other assets in excess of the maximum threshold of £23,250.00, then these other assets will be depleted before the value of your home is taken into account. Depending on the quantity of care you require set against your other assets, the family home may never need to come into the equation.
Nevertheless some people are still of the view that gifting the family home is a prudent step and believe that transferring ownership of their homes to family members can help them avoid the property value being taken into account when they are assessed for care home fees. This can be true; however, giving away your home to avoid care costs is not without a number of risks. Not least, you can go to the trouble, expense and expose yourself to these risks and the local authority simply takes the value of the property into account in any event.
The concept used by the local authority in this regard is known as deprivation of assets in anticipation of care costs. If the local authority believes that you have deprived yourself of an asset to avoid care contributions then it can look to set the transaction aside or impose a charge over a property. Contrary to popular belief there is no time limit beyond which the local authority will disregard the transfer. It will depend much on the intention of the party concerned and the circumstances prevailing at the time.
The other risks you are exposing yourself to concern the fact that you may have divested yourself of your greatest asset and as a consequence left yourselves exposed with little income to pay for your care should the time come. And because you are relying on the local authority to provide care, you will have less say in your choice of home. It is an oft heard lament that one can find oneself paying for care in a bed beside someone whose care is being paid for by the local authority. It is easy to lose sight of the fact that if you are paying for your care you have likely been able to choose the care home that is perhaps closest to family or attractive for other reasons. It is unlikely you will be given much, if any, ability to choose if your care is funded solely by the local authority.
Whilst this may not seem an overriding consideration now, I suspect if you do require care then it would be natural to want the best quality of care and also to be in a home close to friends and family.
It may seem obvious, but if you give away your home you will no longer own it or have control over it. You may be allowed to remain living there but if you wanted to sell and downsize, for example, or release equity you will need the agreement of your donees. This may not be readily forthcoming depending on the circumstances.
2. Inheritance Tax mitigation
People who transfer ownership of their home but continue to live there are also advised that this is not a way to avoid inheritance tax. The property would be covered by the "gift with reservation of benefit rules" - meaning that upon your death the house would be deemed to be taken into account as part of your estate. Furthermore, the Capital Gains tax principle private residence exemption is unlikely to apply to your children and therefore Capital Gains Tax could be payable by them on disposal. The Capital Gains Tax death uplift will be lost.
If you wanted the full value of the property to be removed from your estate for Inheritanmce Tax you would be required to pay a market rent whilst you continued to reside there. After seven years the value of the property would be outside of your estate, however, there will have been income tax payable by your donees on the rent paid. The rent would have to be a market rent and increase over the period to keep pace with the market. If you are deemed to have paid a below market rent then the property will be a gift with a reservation.
It is also worth noting that the current Inheritance Tax threshold is £325,000.00 before any Inheritance Tax is due at 40% on assets above this amount. Furthermore, this nil rate allowance is transferable so with the appropriate Will provisions and planning your £325,000.00 allowance can be transferred to your spouse so that on second death there can be a cumulative total of £650,000.00 of assets passing under the estate before any tax is due. Even in our recovering property market you may feel that a £650,000.00 threshold will be sufficient for some time to come. If so, there is no reason to gift your home and invite the risks, which will be discussed in part two
Part Two Next Month