Should We Sign the House Over to The Kids?
It’s a question we’re often asked. Should we sign over our house to the kids? Or put it into a trust? Whatever your circumstances are, your home is probably your biggest asset, so consider the implications of what you do carefully. Signing over your house isn’t risk-free. And there are plenty of misconceptions about the heavily promoted so-called benefits.
Lifetime Gifts – Cons
Control: Your children may divorce, get into debt or even die before you. Giving away your home means you lose control. Once you’ve made a gift, assume you’ve lost the asset/money for good. Relying on releasing money – for whatever reason, isn’t an option. The money/property belongs to them.
Family Dynamic: Theoretically, your children could put your house up for sale or take out a mortgage on it. If you fall out, this could leave you feeling very insecure.
Inheritance Tax (IHT): Giving away your house but continuing to live there is seen as a ‘gift with reservation of benefit’. Basically, on death, HMRC will tax your estate as if the property was yours.
Shared Ownership: Different IHT rules apply if you share ownership with a child who lives with you. Provided you retain a share of the property, your child lives there, you share running expenses, or you continue to meet outgoings, the reservation of benefit rules shouldn’t apply.
Paying Market Rent: You may also avoid the reservation of benefit trap if you pay full market rent whilst living there. But beware! HMRC will look closely. Keep records and ensure it’s obvious full market rent was paid. In the meantime, your children will need to declare/pay tax on the rent. Capital gains tax (CGT) will also be due when the property is sold (if the value has increased).
Deprivation of Assets & Long Term Care: Assuming you’re fit and healthy when the transfer is made and you later need long-term care, your Local Authority (LA) may not count the value of the property when they make a care assessment. However, if they suspect the timing or your intentions, the ‘gift’ may be classed as a ‘deliberate deprivation of capital’. The value would then be included in their calculations. NB: ‘7 Year Rule’ does not apply. Your LA can go back as far as they want when investigating deprivation of assets.
If you’re still keen to transfer the house, think about putting your property in an appropriate trust.
Pro: As far as Capital Gains Tax (CGT) is concerned, living there as a beneficiary of a trust, means your trustees should be able to claim principal private residence relief when the property is sold (assuming it’s increased).
Con: Usually a trust doesn’t exempt the property value from IHT, because the reservation of benefit rules will apply.
Con: LA’s may mount a ‘deliberate deprivation’ challenge if they suspect your motive/timing, trust or gift. Also, if the value is above your available nil rate band (NRB), a gift to trust could trigger a tax charge at the time of the gift. Subsequent tax charges are calculated at 10-year intervals.
Life Interest Trust
As joint tenants with simple Wills, the property passes outright to the survivor. A common situation.
Alternatively, you could set up a ‘life interest trust’. This trigger on first death and changes the way the property is owned. The survivor, as a tenant in common, can live in the property until death whilst protecting your share should he or she remarry or need care. The ‘deliberate deprivation of capital’ rules shouldn’t apply because the surviving spouse in need of care has given nothing away. It’s their deceased spouse/partner who has done so when they died.
It may be worth considering a lifetime trust arrangement, but we would urge you to take impartial advice from a regulated professional. Think very carefully before you act!
For more information or advice on please call us on 0800 056 6042. We’re here to help.
Please note that all views, comments or opinions expressed are for information only and do not constitute and should not be interpreted as being comprehensive or as giving legal advice. No one should seek to rely or act upon, or refrain from acting upon, the views, comments or opinions expressed herein without first obtaining specialist, professional or independent advice. While every effort has been made to ensure accuracy, Curtis Parkinson cannot be held liable for any errors, omissions or inaccuracies.