Rising property values mean that individuals and couples are often advised to gift their home to children or grandchildren, or to put it into a trust.
Such advice is usually driven by the desire to reduce liabilities for care home fees or inheritance tax. In addition, parents may wish to help younger generations climb the property ladder.
All these motivations are understandable. However, the reality of gifting a home can often derail the original good intentions, with unforeseen and unwelcome consequences.
With care home costs for example, there are several pitfalls. In particular, if a local authority believes the home has been gifted to avoid care home fees, it can ignore the gift and include the property value in its assessment (even recovering costs from the recipients). There are no time limits on councils’ discretion to do this.
Many proposed arrangements for gifting the home to children include the intention that the parents continue to live in it. One risk here is that HMRC decides it is a ‘gift with reservation of benefit’. So long as a benefit in the house is retained, the value of the gift will be included as a part of the parents’ estate and will not reduce inheritance tax on their estate.
Secondly, in practical terms, parents who continue to live in the property are reliant on the new owners’ goodwill. Unfortunately this goodwill may be thwarted or dissipated by future events such as bankruptcy or divorce.
In addition, if a child who is given the house predeceases the parents, the house forms part of his or her estate. There is a clear risk of the home unintentionally passing to less sympathetic relatives (for example, if the child was intestate).
Despite the gloominess of these scenarios, there are many avenues open to parents who want to plan their estates efficiently and also help their children up the property ladder. However, proper advice and caution are essential to ensure that everyone is protected from the ill-effects of unintended consequences.
If you would like advice regarding your particular situation and estate planning options, feel free to contact a member of our Private Client team who would be happy to help.
