20th November 2023
So, let’s set the scene. A mother gifts her daughter her main home of 40 years so she could avoid inheritance tax further down the line. Some years later the relationship between the two breaks down and following a lengthy court battle, the daughter is able to evict her mother.
The 10-year case is, of course, extremely complicated involving a long running feud between mother and daughter which started some years after the gifting of the property. But it raises issues that many people may not have been aware of.
Can homes be gifted to children to avoid inheritance tax? Can you also gift your home to avoid any future care fees?
Although a complex area of law and tax, the simple answer to those questions is yes, but there are consequences, particularly the risk of eviction if relationships breakdown.
When we die our estates (our property and other assets including savings) are subject to inheritance tax at a maximum rate of 40%. That tax is charged if your estate exceeds a certain threshold - £325,000 until 2028 which is known as the nil-rate band.
If your estate is valued under £2 million and when you die your children or grandchildren inherit a property which has been your main home, then this threshold could rise to £500,000.
Naturally, if you give away parts of your estate before you die, then you can reduce its value and therefore the IHT bill. However, you may ultimately fall foul of the seven-year rule that if you die within seven years of making the gift, it becomes chargeable for IHT purposes.
For this type of planning to be effective, you should not benefit from the property after the gift, meaning you should not stay there or, if you do, you will need to pay a market rent.
Another area to be aware of is Stamp Duty Land Tax. If the property is mortgaged when you gift it, it may apply.
Finally, if you are gifting a property, second homes and buy-to-lets will likely incur Capital Gains Tax when you make the gift, whereas your main home may benefit from a specific relief. With that said, making a gift of your main home should be approached with extreme caution because, as we have seen in this recent court case, if the relationship between you and your child breaks down, you are at risk of eviction. You should be comfortable that you are giving away the security of owning your own home.
Understandably, we all want to pass on as much of our wealth as we can to our loved ones. Care is expensive and some people opt to gift their home to their children before the means tested assessment for care-fee funding happens.
If you have no mortgage, there is nothing (besides the issues considered above) to prevent you giving your house to your children, even if you are still living in it – but the local authority will look for signs that you have done this deliberately to avoid paying care home fees and will conduct a thorough financial assessment.
If they believe you have given the house away with the intention of avoiding fees, they can take the value of your home into account, even if it has been transferred to someone else.
There is no seven-year rule in the way there is for Inheritance Tax, the local authority can go back as far as they need when deciding if you have deliberately deprived yourself of assets.
It’s true to say that nothing is simple when it comes to tax planning and inheritance, but getting clear advice sooner rather than later is key to a preferable outcome.