Any homeowner, is permitted to gift their property to a beneficiary at any time, even if they live in it.
There are a number of reasons why people sign their home over to their children (or even grandchildren); as way to support family should they choose to remortgage it, or as a solution to providing them with an inheritance, without it being taxed.
Transferring your house to loved ones in the present can deliver a great sense of satisfaction, as you can see them enjoying your estate early. But it’s far from straightforward, so if you or a parent are considering gifting for any reason then it’s important to be aware of the risks, as well as the advantages for both parties to determine if it is right for you.
The tax implications of passing on property to children
The current inheritance tax rate is at 40 per cent. The threshold (nil rate band) is set at £325,000; or £650,000 for couples*.
Gifting outright - If you were to gift your house outright, then for the purposes of inheritance tax (IHT) it would be treated as a “potentially exempt transfer”. This is great if you are looking for a way to reduce the value of your estate, and thus any IHT. But beware…if you were to pass away within seven years of gifting, then the property would fall back into your estate for IHT purposes.
Continuing to live in the property - If you gift your house but remain living there, this would then be treated as a “gift with reservation of benefit.” This means you keep the right to receive rental income or a share in any sale proceeds, but by doing this the house will remain part of your estate, so even if you live beyond seven years it will be included in IHT calculations.
Paying rent & bills – You don't have to pay rent on the property you are gifting, but by paying rent to whoever you gift your property to and your share of the bills, you can avoid IHT. However, you will have to pay the going rate for similar local rental properties, which could put a strain on your finances if you aren’t used to this monthly outgoing. Either way, if you die within seven years there can still be inheritance tax to pay.
Be mindful of a ‘deprivation of assets’
If you or a parent are going into residential care, you need to be aware of what’s known as a ‘deprivation of assets’.
Care fees are determined by a means test which looks at a resident’s income, savings and assets like property and jewellery.
By deliberately gifting in order to lessen the costs of care fees and qualify for local authority care funding, charges may still be enforced for what was given away, i.e you are still treated as owning the asset.
The only way to be exempt from having to pay towards the cost of residential care is if the person going into care’s capital is less than £14,250. If the capital is over £23,250 then the person has to fully cover their care costs*.
*All information correct at time of article being published.
This article does not constitute financial advice under the Financial Services and Markets Act 2000. You should consult a specialist tax adviser for more details on inheritance tax planning.
- Once a gift is given the transaction cannot be reversed
- The parent is left less financially secure
- If a beneficiary goes bankrupt all residents in the home could be left homeless
- Capital gains tax may be applied to profit made from gifting
Alternatives to gifting
Equity release is just one alternative to gifting. It's a way to unlock money from a property for a tax-free lump sum. How the money is used is free from any restrictions, so it can be passed on to loved ones.
Taking out equity release will reduce the value of the homeowner’s estate and may affect any entitlement to means-tested benefits. Like a traditional mortgage, a lifetime mortgage, which is a popular type of equity release plan, is secured against the home.