Ilyas Patel Accountants in Preston
Ilyas Patel Accountants in Preston
Transferring your home to your children might seem like a smart move to avoid inheritance tax or simplify estate planning.
However, this decision often leads to significant tax implications and other financial pitfalls that can outweigh the perceived benefits.
(Read Time: Approx. 4 minutes)
A common motive for transferring a home to children is to mitigate inheritance tax (IHT).
While it’s true that gifting assets seven years before death can reduce IHT, complications arise when you continue living in the house without paying market rent.
This scenario triggers the “gifts with reservation of benefit” rules, making the gift ineffective for IHT purposes.
The house remains part of your estate and is fully taxable on your death.
Some advocate paying market rent to avoid these rules. However, this rent is subject to income tax for your children, potentially at a high rate.
Over time, the amount paid in income tax could outweigh the IHT savings, making the entire arrangement financially unsound.
Another reason for gifting a home is to avoid selling it to pay for care home fees.
However, local authorities are adept at identifying such attempts to deliberately deprive oneself of assets.
If they determine that the gift was made to avoid care home fees, the gift will be ineffective, and you will still be liable for the fees.
This can leave individuals in a precarious financial situation, having neither the home nor the intended financial protection.
Transferring your home to your children can also create significant capital gains tax (CGT) issues.
If the property increases in value between the transfer and eventual sale, your children could face a substantial CGT bill.
Consider Debbie, who transfers her home to her children, Christine and Miles.
The house, bought for £5,000 in the 1960s, is worth £600,000 at the time of transfer.
While the initial gift is exempt from CGT due to Debbie’s residence, when Christine and Miles sell the house years later, any increase in value is subject to CGT.
If the house sells for £900,000, the £300,000 gain is taxed at 28%, resulting in a significant tax liability that could have been avoided if Debbie had retained ownership until her death.
Some parents believe transferring their home to their children will make things easier after they’re gone.
They think it simplifies the inheritance process, avoiding probate and ensuring a smooth transfer of assets.
However, this well-meaning gesture can cause more problems than it solves.
If your children do not live in the house, transferring ownership takes the property out of the CGT-exempt world of your primary residence and places it into the taxable realm of investment properties.
This means that upon eventual sale, your children will face CGT on the gain in the property’s value from the time of transfer.
If you’ve already transferred your home, a bare trust might offer a solution.
This legal arrangement allows the property to be held in trust, maintaining the original owner’s beneficial interest.
Properly executed, a bare trust can mitigate some of the adverse tax consequences associated with direct transfers.
Alan and Patricia transfer their home to their daughter, Stephanie, but declare that Stephanie holds the property in trust for them.
This arrangement, documented through a deed of bare trust, ensures the property remains part of Alan and Patricia’s estate for tax purposes, avoiding CGT and maintaining the probate value.
To be effective, the bare trust should be established at the time of the property transfer or as soon as possible thereafter.
This timing helps ensure HMRC recognises the trust as valid from the transfer date, thus preserving the intended tax benefits.
To avoid potential pitfalls, it is crucial to consult with tax and legal professionals before making any decisions about transferring property.
They can help you navigate the complex tax landscape and find solutions that protect your financial interests.
For those considering transferring their home to their children, it’s important to:
Transferring your home to your children while continuing to live there is fraught with tax complications and financial risks.
Before making such a move, it’s crucial to consult with tax and legal experts to explore all potential consequences and consider alternative strategies.
Make informed decisions to protect your financial future and ensure the best outcomes for your loved ones.
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Ilyas Patel