Should I gift my home to my children to mitigate Inheritance Tax?

In the lead up to Christmas many people are thinking about the perfect gift for family and friends. Clients often ask our team is it possible to ‘gift’ their home to their children with a view to mitigating Inheritance Tax. Clare Fleming, head of Harrison Drury’s private client team, outlines why it is important to seek professional advice before transferring ownership of your home to your children.

Inheritance tax is currently charged at 40% on the net value of your estate exceeding the Inheritance Tax Nil Rate Band. The Inheritance Tax Nil Rate Band applicable to your estate is dependent on your personal circumstances and ranges from £325,000 to £1m.

It is very rare that we would recommend gifting your home to your children as there are some very serious pitfalls to consider.

If you are considering making a gift of your home to your children, you should bear in mind the following consequences:

1. You will have to pay a market rent to your children

If you gift your property to your children and they live elsewhere, you will need to pay your children a market rent.

If you do not pay a market rent, HM Revenue and Customs will argue you have not made a valid gift to your children because you have retained the whole benefit of the property. This is called a ‘gift with a reservation of benefit’ and means your property would still form part of your estate for inheritance tax purposes regardless of when that gift was made.

2. Your children may have to pay higher rate Stamp Duty Land Tax or Capital Gains Tax

Your children may have to pay higher rate Stamp Duty Land Tax if they buy another property as they will be considered to own a second home.

Your children may also have to pay Capital Gains Tax on any increase in value on your home. This would apply if the property is sold in the future and your children are not living in that property as their first home.

3. Your children could divorce or be made bankrupt

If your child/children were to divorce or get into financial difficulty, your home could form part of any ancillary relief or bankruptcy court proceedings and your property may need to be sold.

Not only does this bring the risk of leaving you homeless but it also means some of the net proceeds from the property could be payable to third parties.

4. A change in ownership could lead to difficulties

In the unlikely event of one of your children dying before you, their share of your home would form part of their estate. This means you could find yourself owning a property with your son or daughter in law or even your grandchildren.

5. Local authorities may refuse to fund your care

If you require residential or nursing care, the Local Authority may argue that you have gifted your home to avoid paying care home fees. This is called a ‘deliberate deprivation of assets’. As a consequence, the Local Authority may refuse to fund your care.

Seek professional advice before planning any property ‘gifts’

These above points should be carefully considered before you make any plans to ‘gift’ your home. We strongly advise that you seek professional advice from a solicitor before transferring the ownership of your home to your children.

Clare Fleming, a director at Harrison Drury, has more than 15 years’ experience in private client work including wills, Inheritance Tax planning and Lasting Powers of Attorney.

If you would like further information on any of the points outlined above or seek further advice on Inheritance Tax planning and preparing wills, please contact Clare on 01772 258321.