Giving your property to your children – is it a good idea?

Giving your property to your children – is it a good idea?

If you have been giving though to gifting your property to your children, there are many factors to consider and, depending on your reasons, there may be better options, depending on your circumstances.

Inheritance Tax Considerations

Whether Inheritance Tax (IHT) will be payable upon your death is also determined by the size of your estate.

While there are many criteria as to whether IHT will be payable, generally speaking if your estate is worth less than £325,000 at the time of your death then no Inheritance Tax will be due.  So, if you gift your property to your children, you may consider that your estate will not be large enough for any IHT to be paid.

Many families who own property in the Ormskirk, Southport and wider Lancashire area will have estates in excess of the Inheritance Tax allowances.

If you make this gift with this in mind, in order to avoid what is known as ‘a gift with reservation of benefit’ you cannot continue to live in the property as you would still be retaining an interest in it and so it would still form a part of your estate for IHT purposes.

To stay in the property, you would need to pay rent to your children at the full market rate or move out.  Open market rents for properties in Ormskirk, Southport, Wigan and wider Lancashire do change so any tenancy needs to be regularly reviewed.

In the situation that you have made the gift of the property, but you unfortunately pass away within seven years, the property would still be counted towards the value of your estate.

Asset Protection

Many people are worried about what will happen to their home if they require residential care as they get older. The media, print and online, are full of stories of people having to sell their home to pay for care fees.

There is a common misconception that if you transfer your home to your children then it will definitely reduce the likelihood of an individual having to pay care home fees in the future.

The reality is that If you reach a point where you require residential care and have over £23,250, you are required to pay your own fees in full, known as being self-funding. Care homes in Southport, Ormskirk, Parbold and throughout Lancashire and Merseyside can be expensive with it not being uncommon for fees to be in excess of £1,000 per week.

Transferring your home for the sole reason of reducing the value of your estate to will not get you round having to self-fund. If you have decided to reduce the size of your estate by gifting your property, the local authority could view this as a ‘deliberate deprivation of capital’ when it comes to reviewing your past transactions.

If they believe you have attempted to do this, they will still class your property as being a part of your estate. Local authorities look at a range of factors when considering whether a transaction amounts to a deliberate deprivation of capital and it is a complex area of law.

Consequences of the Transfer of Property

Upon gifting your property, you must remember that you are giving up the legal rights of owning the property.  This loss of control will put you at risk from the 3 D’s:

  • Death
  • Divorce
  • Debt

If your children were to die before you, get divorced or get into debt then your home is at risk if you have transferred it to them and you would no longer have any control because you would not be the legal owner anymore.

You will therefore cease to have any legal right over what happens to it in the future; your children could sell it and you would not be entitled to any of the proceeds from the sale.  They could get divorced and the house form part of the financial settlement or, if they are declared bankrupt, it could be classed as an asset.

Other Options

Depending on your reasons for wishing to gift your property, there are several alternatives available to you:

  • You establish a lifetime trust as part of an overall estate planning exercise. Depending on your circumstances a trust could be a god option.
  • Creating a trust within your Will, known as a life interest trust.  Under this type of will, both you and your spouse would hold a separate share in your property as beneficial tenants in common, usually 50%.

If your spouse were to pass away, under a life interest trust, their half would be placed in the trust, securing it for your children whilst specifying that you can remain in the house for the rest of your life, or until you need to go into a care home.  This is compared to a standard will where the half of the property owned by your spouse would automatically pass to you, forming a part of your estate. This helps protect 50% of the house from care fees and preserves 50% of the property should the surviving spouse decide to remarry.

We have been advising clients in Ormskirk, Southport, Wigan, Lancashire and Merseyside on Wills, Estate Planning and Asset Protection for over 200 years

If you are considering your options in relation to your property, then call our offices on 01695 574 201 or 01704 504381 to speak to one of our solicitors. You can also email us by clicking here.