In the Private Client department our clients often ask us whether putting their home into the names of their adult children would be a good idea.
This is usually due to concerns about costs of care as they become elderly and the idea that their home might be “taken” by the government for Inheritance Tax on their death when they wish to preserve their home for future generations.
Whilst these are perfectly understandable concerns and, on the face of it, transferring the home to a child seems a very logical way to safeguard against such concerns, more often than not the answer to this question is “No, it would not be a good idea”.
A transfer of this kind would be deemed as a gift from parent to child and the legal authority to then deal with the house would pass to the child. Whilst the parent may trust the child to act entirely in their parent’s best interests; if the child were to subsequently go through a divorce or bankruptcy, the house would be seen by the relevant authorities as belonging to the child. This puts the parent at huge risk of losing their home, and the equity therein, and is entirely out of the control of the child (and the parent).
The above risks are in addition to the complete loss of control that the parent then has over their own home. They would be unable to raise equity using their home as security and may be limited in their ability to sell and purchase a new property using the proceeds of sale.
There are of course also risks to the child receiving the gift. If the child is receiving any form of means tested payments the value of the home would be considered in any financial assessment they undergo. The child would also be legally responsible for the maintenance of the home and, should they wish to buy their own home in future, they would be treated as owning two properties which could have severe Stamp Duty Land Tax and Capital Gains Tax consequences.
With regard to Inheritance Tax; there is a common misconception that giving your home away avoids the need to pay associated Inheritance Tax on your death.
Despite the treatment of the house as legally belonging to the child, if the parent has retained any benefit from the house (such as living in it or receiving rent from it) this gift would be seen as a Gift with Reservation of Benefit. When reporting to HM Revenue & Customs, Personal Representatives must disclose any such gifts and they are included in the Estate’s value for Inheritance Tax. This, of course, entirely undermines any intention of the parent to save Inheritance Tax.
With regard to paying for care; if an individual makes a large gift shortly before undergoing a financial assessment, this is often treated by the local authority as deprivation of assets. If a local authority finds you have deprived yourself of assets this can result in you being treated as still owning the asset, even though you don’t, and even the local authority reclaiming the gift on your behalf.
Of course, there are circumstances in which a transfer of this kind could be beneficial to all parties, but it is important for each to obtain independent legal advice both before and during the transaction.
If you would like to discuss any issues raised in this article or your affairs generally, please contact Charlotte Fox, one of the solicitors in our Private Client department in Queens Road, Reading, on 0118 958 9711 or firstname.lastname@example.org and she and the team would be glad to assist you. You can arrange an initial fixed-fee one hour consultation for just £95 including VAT by clicking the link above and filling in the booking form.