I’m 71 years old and live in a property worth about £900,000 with my adult son. I also have a daughter who lives in her own property.
I’m keen to keep my inheritance tax liability to a minimum when I die with my estate (including my pension pot) currently worth around £1.5million.
I am a widower and understand that £1million of my estate would be free of inheritance tax provided I leave everything to my children.
I’m considering gifting 50 per cent of my home to my son, and according to the HMRC website as long as we both live in the property for seven years then 50 per cent of the value of the house when I die would be inheritance tax exempt.
I would leave the other 50 per cent of the property to my daughter in my will with the remainder of my estate split equally between the two.
Are my assumptions correct and are there any obvious pitfalls in doing this?
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Heather Rogers replies: The question of gifting property during one’s lifetime comes up in most inheritance tax planning meetings.
Gifting a property that you live in does indeed have pitfalls and it is important to know what they are before you proceed down this route.
The first question I always ask clients is ‘why’?
Inheritance tax: Should you give your home to your children to avoid a bill?
If it is just for inheritance tax purposes, then remember that although inheritance tax planning is an important part of any sensible financial review, the most important person in this situation is you.
The fact is that being financially secure is a very important part of our lives when we get older and may need care, and it is an enviable position to have options to maintain our quality of life.
One’s home is often the main asset and therefore it is important not to create a complex situation that causes problems for us either during our lifetime or after our death that could have been avoided by making a different decision.
I will talk about the issues that anyone considering gifting their home should consider, and then turn to the specifics of your situation.
Should you give away your own home during your lifetime?
There are in my opinion two main issues to consider before such a decision is made, plus a third which will be important if you need care in future and might become unable to fund it yourself. These are:
– The gift with reservation of benefit rule;
– Legal implications of giving away all or part of an asset during your lifetime and the effect it will have on you;
– Deprivation of assets for the purposes of care fees and assessments.
What is a ‘gift with reservation of benefit’?
It is often too simply said that if you survive seven years after a gift is made, then the gift will be outside your estate for inheritance tax purposes.
This is true, but if the gift is not really an outright gift – in other words, you continue to benefit from the gift or use the asset for your own purposes – then it isn’t a gift at all.
The title may have been transferred, but the asset remains under your control or for your benefit.
Therefore if you are considering such a move, there will be steps needed to minimise this being the case and this may not be as simple as it sounds.
If you gift your home or part of your home to another person, and continue to live in it as you did before, then a ‘gift with reservation of benefit’ will arise and inheritance tax will still apply.
Normally, if a gift is made to a third party who does not live with you, such as a family member during your lifetime, then you would need to pay them rent at market rates for the part or whole of the home that you have gifted for the entire time that you remain resident in it.
This may be quite a costly monthly draw on your income. Also, the recipient would be taxed on the rent paid to them by you, which could give them an expensive tax bill.
If you died within three years then no benefit would arise in any case, except you would have paid out a lot in rent.
Avoiding falling foul of the ‘gift with reservation of benefit’ rule can get even more complicated if you are living with the child who received the gift, and I will go into this in more detail below.
What are the legal implications?
If you gift all of your home to someone else, then you would need protection to ensure that the house could not be sold over your head and you become homeless.
Circumstances can change with family members: they can get into financial difficulty or become bankrupt; they can marry, divorce or remarry; they can fall out with each other and/or you.
The position for the gifting party can therefore become very insecure.
Even if you only gift part of your home, you are no longer the sole owner and not able to make decisions without the other party’s agreement, which can be restrictive and cause worry during a period when you should be not troubled by financial and legal concerns.
What is ‘deprivation of assets’?
Apart from potential tax and legal considerations, gifting assets whilst you are alive can be determined by your local authority to be ‘deprivation of assets’ for the purposes of care fees and assessments.
This means giving away assets whilst you are alive to deliberately reduce the value of your estate in order to avoid funding your care and force your council to pick up the bill. It can apply to income as well as assets.
The local authority’s financial assessment for care will ask for assets you used to own. If it decides you deliberately gave them away to avoid care fees, it can disregard the gift, proceed as if you still owned it and recover the debt from those who received the gift.
There is no seven-year rule that applies here, and local authorities can look at gifts going back as far back as they wish. Deprivation of assets is laid out in the Care Act 2014.
What do you need to know before giving away half your property?
Because your son lives with you, your circumstances are slightly different. Here is what to consider.
Ownership: The property would need to be owned as tenants in common, meaning you both own a fixed percentage of the house, for example 50/50, leaving you free to leave your half to your daughter.
This is different from joint tenants where you both own the house ‘as one’. In these circumstances, your share of the home would pass to your son under the survivorship rules; nothing in your will would override that fact.
Inheritance tax thresholds: As your share is passing to your daughter the ‘residence nil rate band’ would still be available. (See the box below)
Capital gains tax: There is no CGT on any transfer of ownership to your son as you can claim ‘private residence relief’ (PRR).
Your son, providing he remains living in the property until it is sold, would be able to claim PRR for his share on any eventual sale.
Your daughter would pay CGT on her share over and above the probate value on sale if her main residence is elsewhere.
Gift with reservation of benefit: To minimise the likelihood of this issue being a problem, you and your son would both need to pay an equal share of the bills – council tax, electricity and gas, insurance, water and so on.
You would need to be responsible equally for the cost of repairs and maintenance.
Your son’s future plans: You need to consider that if your son moved out you would need pay to rent at market rate for your share, which on a house of that value could be costly.
You would not be easily able to sell the property if you needed to without his agreement.
If he bought another property he would pay a higher rate of Stamp Duty Land Tax because he already owned a share in your home.
Also, if his circumstances changed and he married, then you could come under pressure for him to release capital for another house purchase.
Should he marry, his spouse would in effect have a stake in his share of the property too, though that may not become a problem except in cases of assets being split in a divorce.
Care costs: Even if you avoided the deprivation of assets issue explained above, your own share of the home would still be considered as part of any means test for care costs in the future, should your other funds run out.
At around £1,000-£1,500 a week for care home costs this can happen faster than you think!
Legal advice: I advise you to see a solicitor to discuss the matter. You will need them to draw up a deed of gift in any case.
You will also need to demonstrate that you are paying your share of bills and repairs. And you will need to ensure adequate protection for you if your son’s circumstances change.
He will need to make a will to determine what happens to his half of the house should he die before you. However, if he married that will would be automatically revoked, and he would need to make another if he wanted to leave his share back to you.
Ask Heather Rogers a tax question
Heather Rogers, founder and owner of Aston Accountancy, is our tax columnist.
She is ready to answer your questions on any tax topic – tax codes, inheritance tax, income tax, capital gains tax, and much more.
If you would like to ask Heather a question about tax, email her at taxquestions@thisismoney.co.uk.
Tax expert Heather Rogers answers our readers’ questions
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