You have many reasons for making the decision to gift your home to your children or other family members. It is important you factor in all costs and relevant considerations before you do so, some of which may not initially be that obvious and have unintended consequences when thinking about passing over the home. You may want to financially secure their future as much as you can and minimise tax payable in the future. So called ‘estate planning’ is becoming common place with high house prices in turn pushing up the total value of peoples net wealth.
The law permits you to give your property to your children or other family members, even if you wish to continue to live in it. However, gifting your home is not as straight forward as it may initially appear. The position differs depending on whether you intend to carry on living in the property after you have gifted it.
If you were to make an outright gift of the house to your child to reduce the value of your estate, it would be treated as a ‘potentially exempt transfer’ for the purposes of Inheritance tax (IHT). If you were to die within 7 years of gifting, then the property would fall back into your estate for IHT purposes and would become ‘chargeable consideration’. If however, you went on to survive for 7 years after making the gift, there would be no IHT bill. You will have given up the right with an outright gift to receive any rental income or a share in the proceeds.
If however you sign over your house but remain living in the property, this is then treated as a ‘Gift with Reservation of Benefit’ which is where an asset is gifted to another person but is still being used by the original owner. From a tax perspective, the property will remain part of your estate on your death for IHT purposes. In turn, your children or family members could face a tax bill. One way around this is to pay a full market rent for your use of the Property after you have gifted it. In this situation, your children or family members would be liable for income tax on the rent you pay them.
In either scenario, once you have gifted your home you will no longer be the legal owner of the home. If you were to fall out with your children or family members, the worst-case scenario is you could be evicted. Issues can sometimes arise if the children/family members decide they want to rent out or sell the Property and you are forced out. You would lose control in this eventuality. There is also the possibility that married children could divorce and they may be forced to sell the home and the ex-spouse would have a claim against their estate, which would then include the gifted property. All of these are issues to factor in when deciding how to proceed.
Other avenues to explore with professional advice would be to sell the home, buy a smaller one and gift the net proceeds to your children, although you would still need to survive the gift by 7 years before the money falls outside your estate for IHT purposes. Another option to think about would be to give a share of the home to family members and live in the property together. Lastly, you must consider other applicable charges, such as capital gains tax and you must ensure the local authority will not view the manner in which you proceed as a direct attempt to avoid care home fees.
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