As a parent, you may be considering signing over your property to your children.
Estate planning is becoming an increasingly common concern as house prices shoot upwards, pushing up the total value of people’s net wealth.
As a homeowner, you are permitted to give your property to your children at any time, even if you live in it.
But gifting your home is far from straightforward, and you need to be aware of the costs you could potentially face, as well as some of the other considerations before making any decision.
Think about IHT implications – “potentially exempt transfer”
If you were to make an outright gift of the house to your child in a bid to reduce the value of your estate, it would be treated as a “potentially exempt transfer” for the purposes of IHT.
If you were to die within seven years of gifting, then the property would fall back into your estate for IHT purposes.
If, however, you were to survive for seven years after making the gift, there would be no IHT bill.
That said, having given the property as an outright gift, this means you are giving up any right to receive rental income or a share in the proceeds.
Read more about reducing inheritance tax
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Be aware of the rules on “gifts with reservation of benefit”
By contrast, if you sign over your house but remain living in the property, this would then be treated as a “gift with reservation of benefit.” This means you reserve the right to benefit from the property.
According to tax rules, the house will then remain part of your estate on your death, even if you live beyond seven years.
One way to get around this is by paying rent to your children. But you will have to pay market rent (the going rate for similar local rental properties) to take it out of the IHT net.
You also need to bear in mind that your children will then be liable for income tax on the rent you pay them.
What are the rules around tax and giving money to children?
You will no longer be the legal owner of the property
Once you have signed over your property to your children, it will be counted among their assets, so even if you plan to go on living there, you will no longer be the legal owner.
This means that if you fall out with your children, you could be evicted.
Equally, you could be forced out if your children decide they want to rent or sell the property – or live there themselves. You will have no control over this, and your children will be able to make a decision without seeking your permission.
Risk from outside parties
If you sign over your home, you need to consider the possibility that your child may divorce. If this happens, they may be forced to sell. Equally, your son or daughter’s ex-spouse would have a legitimate claim against their estate which would also include your property.
If your son or daughter had an issue with bankruptcy, the property would form part of their estate. This could then potentially be claimed by creditors seeking to claw back money from their estate.
These are all things you need to bear in mind before making any decision on signing your home over to someone else.
Don’t forget capital gains tax
Before gifting your property, you also need to think about other charges, such as capital gains tax (CGT).
This applies where a property is not a “principal primary residence.”
This could apply if, for example, your child is not living in the property when it is transferred into their name but has increased in value when they come to sell it.
Equally, if you are giving away a second home or holiday home, then you may be liable to pay CGT on any increase in value that has occurred between first owning it and giving it away.
Beware of “deliberate deprivation of assets”
As a parent, you need to tread carefully before passing your property on to your offspring as the council could view this as “deliberate deprivation of assets” to avoid residential care home fees.
Put simply, transferring property to your children in this way may be seen as an attempt to conceal property wealth to avoid paying for care.
If this is deemed to be the case, the local authority can reverse the transfer of ownership. This means the home is switched back to the parents, and will be included in the test for funding.
Can you avoid care home fees?
What happens if you outlive your children?
If you outlive your children, you need to be aware that the property will be passed on to their beneficiaries.
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A few alternatives
Give away your home and move out
If you sign over your home to your children and move out, you are permitted to make social visits and stay for short periods without affecting the seven-year rule on IHT.
Consider selling your home and giving your children the proceeds
If you sell your home, you could then gift the proceeds from the sale to your son or daughter. However, you still have to survive this gift by seven years before the money falls outside of your estate for IHT purposes.
A guide to gifting property and tax
As signing over a property involves a lot of complicated tax and other financial implications, it is well worth seeking specialist advice before making any decision.
For more information on leaving gifts for your children and grandchildren, check out our complete guide to giving gifts to grandchildren, as well as our guide to tax and giving money.
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