There are many reasons why people wish to give away their home to another person. It is crucial that the benefits, risks and foreseeable consequences of making the gift are fully understood so that the donor can decide to make the appropriate decision. It may be that there are more effective ways of achieving the same objective.
If you give away but still live in the property, then the gift may be ineffective in saving any inheritance tax and the value may be cumulated with the other assets that you own upon death. If the value of the gift exceeds the nil rate band and you do not survive the gift by seven years, then there may be complicated tax implications for your estate and for the recipients of the gift. If your estate is likely to be taxable, it is important to receive tax planning advice before giving away your home.
Benefits of transferring assets
The gift of your home may reduce the value and complexity of your estate which is likely to reduce the administration costs.
Once given away, the asset may not be taken into account if you have to undergo means testing for benefits or publicly funded services such as repayment of nursing home fees. You may also avoid the need to sell assets to pay care fees provided sufficient time has elapsed since the transfer and the reason was not to reduce your assets so as to qualify for certain benefits. In these circumstances, the value of your home may not be taken into account to decide your entitlement to financial support.
You may wish to be relieved of the burden of responsibility for the home. If you give your home away but continue to live there, you may agree to be responsible for the buildings insurance and general maintenance. However if you wish to avoid the situation where the gift is ineffective for inheritance tax, you may be asked to pay an open market rent by the recipients of the gift.
If you do not own a house, there may be savings in both time and expense in applying for a Court Order from the Court of Protection in the event that you lose mental capacity and there is no relevant Power of Attorney in force.
Risks in giving away your home
The value of your home may still be taken into account for funding care fees as there are anti-avoidance measures in relation to means testing. Local authorities have power to assess you as if you still own the asset.
If you need to move into a nursing home at a later date but you do not have the resources to pay for your care as you have given away your property, the local authority may only pay for the basic level of care – leaving you to rely upon the financial support of others to enable you to move into your preferred (more expensive) nursing home. The recipient of your home may not be able or may not wish to provide the support expected, for instance, by not topping up care home fees or by moving you prematurely into residential care in order to occupy or sell your home.
If the recipient dies or runs into financial difficulties or divorces, then a third party may have a claim on the home if you still live there. You may be made homeless as the third party seeks to release the value tied up in the gifted home.
If the relationship between you and the recipient breaks down, there may be considerable difficulties if you are still living in their house and the recipient may even put pressure on you to move out.
The loss of a significant part of your assets may reduce your chances of adapting to changing circumstances, for instance, by downsizing or releasing equity to pay for adaptions or care at home. In these circumstances you may have no option but to move into a care home.
If the arrangement is challenged later by the Department of Work and Pensions or local authorities, there may be additional legal fees.
As set out above, there may be no inheritance tax saving if you continue to benefit from the asset by living in the home after you have given it away. The capital gains tax main residence exemption will be lost unless the recipient of the gift also lives at the property. There may be no automatic uplift to the market value of your home for capital gains tax on your death.
Stamp duty land tax and additional administrative burdens may be payable.
In certain circumstances, the gift of your home to your child(ren) or others may suit your particular circumstances. But there may be other solutions, for instance, if you are seeking relief from the responsibility of managing your home, granting a Lasting Power of Attorney to a family member may be a better way of dealing with the issue. In every case, you should obtain full and specific advice before taking a decision.
If you would like to find out more information on the implications of making a gift of your home, please contact our Wills, Tax and Probate team.