Giving property to children

What are the benefits and downsides of giving your property to your children before you die and will they still have to pay inheritance tax on it? We explain what you need to know.

Updated

Although there are no rules stopping you from giving your home to your children before you die there are a number of issues you need to think about before you decide whether to do so.

Two reasons you may be considering it are to reduce the inheritance tax bill your children have to face when you die or to avoid paying care home fees in the future. Achieving either of these isn’t straightforward (or may not even be possible in the case of care home fees) and there may be unintended consequences.

Inheritance tax implications

If you sign your home over to your children before you die and move out they will not have to pay inheritance tax on it if you live for at least seven years afterwards as it won’t form part of your estate. This is known as a “potentially exempt transfer”. You can still stay there for short periods but there are guidelines on how long and how often these visits can be.

To carry on living in the property you must pay your children a market rent (which they will have to pay income tax on) and carry on contributing to the household bills. If you don’t pay rent and continue to live in your home for free or very cheaply this is known as a “gift with reservation of benefit”. In this case your home would still count as part of your estate when you die, regardless of how long you live.

If you only give away part of your property and you live there with your children, though, you don’t have to pay rent.

If you die within seven years, your home will form part of your estate and your children may have to pay inheritance tax on it depending on its value. You can pass on up to £475,000 to your children (or grandchildren) when you die before they have to pay anything if this includes a home you owned and your estate is worth less than £2m. This increases to £500,000 in the 2020–21 tax year.

They will pay 40% on anything above the threshold if you gifted the property to them within three years of your death. The amount then decreases with each extra year. They will only pay 24% if you gave it to them between 4 and 5 years before your death, for example, and 8% between 6 and 7.

However, if your spouse died before you gifted the property and didn’t use up their own inheritance tax allowance you will have inherited whatever was left of it so could have a threshold of up to £950,000.

If your home was owned jointly with your spouse when you gave it to your children and only your spouse dies within seven years, half the value of the property will form part of their estate so your children would pay inheritance tax above £475,000.

Another way to let your children benefit from your home before you die is to sell it and give them the proceeds, but the same seven-year rule applies.

If you sell the property to them for less than the market value instead, the inheritance tax rules will be applied to the difference between this amount and the true market value.

Gifting property that isn’t your home

If you give a property to your children that you don’t live in, for example a buy-to-let property, you will have to pay capital gains tax on the difference between what you paid for it and the current market value.

If the difference is less than £12,000 (£24,000 for a couple owning the property jointly) you don’t have to pay capital gains tax. You pay 18% on anything above this if you’re a basic-rate taxpayer and 28% if you’re a higher or additional-rate one.

The seven-year rule still applies for inheritance tax purposes.

Potential downsides

As you will no longer be the legal owner of the property you won’t have any say if your children decide they want to sell it against your wishes or move in themselves, so you could be forced to move out if you were still living there. You also won’t necessarily benefit from any of the proceeds of the sale.

Also, if any of your children get divorced, part of the property could end up being owned by their ex-spouse or it might have to be sold. And if your children were to become bankrupt the property would be counted as part of their assets and could be sold to pay off their debts.

If your children die before you the property would be passed onto their beneficiaries rather than being returned to you (unless you were named as the beneficiary in their will).

Bear in mind that if there is still a mortgage on the property when you give it to them and your children take the mortgage on they will have to pay stamp duty on that amount.

Avoiding care home fees

If the council thinks you’ve given your property to your children with the purpose of avoiding care home fees this would be classed as “deliberate deprivation of assets” and your home would have to be returned to you and included in the assessment for funding. The exception would be if your partner still lived there.

The council would look at all the assets you’ve previously owned along with why and when they were gifted to decide whether it was “deliberate” or not.

It’s possible to put your home into trust with your children as trustees so you no longer own it but councils may still see this as done with the intention of avoiding care home fees. However, this can have other advantages over gifting the property, including that you can have a say in what happens to the property when you die, you can still benefit from its value if it’s sold and it won’t form part of your children’s assets in the case of bankruptcy or divorce.

In England and Northern Ireland, if you have assets of more than £23,250 you have to pay for all your care yourself. The threshold is higher in Scotland and Wales.

It’s essential to take legal advice to decide whether giving your property to your children or putting it into trust is worth doing.

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