This is a question we are asked frequently at Barrett and Co. This is usually due to concerns about the costs of care as our clients become older, or perhaps fears that their home would have to be sold to pay Inheritance Tax on their death. Naturally, our clients want 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 might seem a 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”.
When an adult child gets divorced…
A transfer of this kind would be deemed as a gift from parent to child. The parent may trust the child to act entirely in the parent’s best interests, but if the child were subsequently to go through a divorce or bankruptcy, the relevant authorities would include the value of the house in any assessment of the child’s finances, as the child now owns the property. This puts the parent at huge risk of losing their home and is entirely out of the control of the child (and the parent).
Total loss of control…
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 take out a mortgage or equity release and would be completely at the mercy of the child if the parent wishes to move house. There are also risks for the child receiving the gift. If the child is receiving benefits or maintenance, the value of the home might be included in any financial assessment.
Two homes have tax consequences…
The child would also be legally responsible for paying for all maintenance and repairs of the property. In addition, should they wish to buy their own home in the future, they would be treated as owning two properties which could have significant Stamp Duty Land Tax and Capital Gains Tax consequences.
Inheritance Tax problems…
With regards to Inheritance Tax, there is a common misconception that transferring ownership of your home to your children would take the value of the property out of your estate when calculating any Inheritance Tax payable as a result of 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 will then fall foul of some anti-avoidance provisions known as the “Gift with Reservation of Benefit” rules. When reporting to HM Revenue & Customs, Executors or Administrators have a legal duty to disclose any such gifts, and the value of the asset given away is added to the value of the individual’s estate for Inheritance Tax. This of course entirely undermines any intention of the parent to save Inheritance Tax.
Care Home Fees…
With regards to paying for care, if an individual makes a large gift and later undergoes a financial assessment for care fees, this will almost inevitably be caught by the “deliberate deprivation” rules.
If a local authority decides that you have deliberately deprived yourself of money or an asset with the intention of avoiding paying for care fees, this can result in the local authority treating you as still owning it (even though you have given it away) and including its value in their financial assessment.
It may be that a Will with a Trust could provide a good solution to mitigate the impact of care home fees, and you should talk to us about Trust Wills if this is an area of concern.
Of course, there are circumstances in which a transfer of a property could be beneficial to all parties, but it is important for each to obtain independent legal advice both before and during the transaction.
Get in Touch
At Barrett & Co we offer an initial fixed-fee one-hour consultation for just £95.00. If this is something you are considering, please call our Private Client solicitor Charlotte Fox on 0118 958 9711 or contact her by email on [email protected].
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