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Thinking about gifting your home to your children to avoid inheritance tax? Think again…

Esther Omishore, a trainee solicitor in our private client department, explains what to consider when it comes to gifting your home and looks at a recent court case regarding a gifted property.

One of the most common questions we receive about inheritance tax is its potential to significantly reduce the amount of wealth a client has available to leave to their children when they die. Many clients want to know how they can pass on their property without incurring a huge inheritance tax bill for their children in the future.

In the UK, inheritance tax is a tax on the estate of someone who has died. Currently the inheritance tax threshold, known as the Nil Rate Band (NRB) is £325,000. This means that if your estate is worth less than £325,000, there won’t be any inheritance tax to pay, but any amount over the threshold will be taxed at 40%. Gifting your property during your lifetime calls for expert legal advice and careful planning to avoid any potential tax or legal complications arising.

Gibbons vs. Gibbons

Let’s consider the recent legal dispute concerning an 82-year-old mother, Norma Gibbons, who was ordered by the court to vacate her home some years after transferring the property into her daughter’s name. Norma Gibbons and her daughter Dawn Gibbons shared the freehold and lived in the property together in two separate flats until 2004, when Norma transferred the upstairs flat into her daughter’s name to avoid inheritance tax. This transfer was only uncovered in 2008, when their mother/daughter relationship broke down.

Dawn subsequently made an application to the court seeking to have her mother removed from the property. The defendant, Norma, claimed that Dawn had tricked her into transferring the property into her name. The judge rejected this claim maintaining that Norma willingly transferred the property to her daughter to avoid inheritance tax. It was said that Norma intended to live in the property for the rest of her life.

This case is an unfortunate example of what can happen if you choose to give away your home during your lifetime, especially if you intend to remain in the property for the rest of your life. Norma could not have foreseen that she would be kicked out of the property she purchased and lived in for over 40 years. Legal advice should always be sought prior to transferring the property.

What should I consider before gifting your home?

 

  • Family Relationships

Giving away your property means that you are giving away ownership including all legal rights in the property to someone else – albeit your own children. A break down in a parent/child relationship is common and unforeseeable.

  • Divorce

If your children are married or intend to marry in future, the possibility of divorce is another important consideration. If your child or children get divorced, your property could potentially be included in their divorce settlement.

  • Bankruptcy

The possibility and risk of bankruptcy is another important consideration. If you gift your property to your children and they are subsequently made bankrupt, the property may have to be sold to pay off their debts.

  • Death

As a parent, far from your mind would be the likelihood of your children dying before you. However, should this happen, the property would then pass by will or intestacy to their children or spouse who may subsequently wish to sell or live in the property and could therefore evict you.

  • The seven year-rule

Please keep in mind that if you make a gift to your children and die within seven years of making the gift, inheritance tax will still need to be paid. Although, the amount paid will begin to decrease after 3 years. (for further information on gifts and inheritance tax, please see Gifts and Inheritance Tax – what you need to know)

  • Gift with a reservation of benefit

A rule known as a ‘gift with a reservation of benefit’ arises when you have gifted your property to someone but continue to live in the property and retain a benefit. In this case, the value of your property will still be accounted for inheritance tax purpose unless it can be shown that you paid rent at full market rate whilst living in the property. It must also be shown that payments were regularly reviewed to ensure that full market rate was paid.

  • Care fees and deliberate deprivation of capital

If you purposefully transfer your property to reduce the value of your assets considered in the financial assessment for care home fees, it may be regarded as deliberate deprivation of capital. If your local authority determines that you intentionally disposed of your property in order to receive financial assistance for care expenses, they can still consider you as the owner of the property for assessment purposes and, in certain cases, recover the gifted property from your children.

Estate Planning: How we can help?

There are going to be very few situations where you will be advised to gift your home to your children during your lifetime – especially if you plan to continue to live in the property for the rest of your life. Estate planning is a continuing process that requires proper financial and legal advice and strategic planning for the near and distant future.

Are you thinking about gifting your home during your lifetime? Our expert solicitors can advise you on how best to mitigate any inheritance tax implications so that your loved ones can simply enjoy their gift without having to worry about paying inheritance tax on it later. If you would speak to one of the team, please call us on 020 8771 5254. We are experts in this area of law and offer a free initial assessment on your legal matter.

About the Author

Esther Omishore is a trainee solicitor in our Private Client department. Based in our Crystal Palace office, Esther specialises in will writing, lasting powers of attorney, and estate planning.

 

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