Many people consider gifting property during their lifetime, often as a way to help family, reduce inheritance tax or prepare for future care costs. However, gifting property is a major legal and financial decision and it’s essential to understand the consequences.
Why do people gift property?
Many people gift property to lessen the potential inheritance tax burden for their families. This is generally most effective where the person survives for seven years after making the gift. If they pass away within that timeframe, inheritance tax may still apply although, in some circumstances, the rate of inheritance tax can be reduced the longer they live after the date of the gift.
Others consider gifting part or all of their property to try and avoid care home fees in later life, but this can come with complexities. Local Authorities are increasingly alert to what is known as a “deliberate deprivation of assets”, where someone gives away money or property in order to reduce their financial contribution to care. If the council believes this has happened, they can treat the gift as if it never occurred for assessment purposes, regardless of when it was made.
Consideration to care
As the law currently stands, if you have more than £23,250 in capital, which includes your savings, investments and property you’ll be expected to pay for the full cost of your care. If you have between £14,250 and £23,250, you’ll contribute on a sliding scale.
When it comes to your home, there are protections in place. If a spouse, disabled relative, dependent child, or someone over 60 lives in your property, it may not be included in the financial assessment for care. If your home must be sold to fund care, you may be able to enter into a Deferred Payment Agreement with the council allowing you to delay payment until after the property is sold or after you die.
Why can gifting property go wrong?
The Local Authority has power to investigate a deliberate deprivation of assets - and there is no time limit on how far back they can look. Even if a gift was made many years ago, if care needs were reasonably foreseeable at the time, the council could treat the property as though it still belongs to you and refuse to offer support, or worse, pursue the recipient for costs.
There are also legal pitfalls associated with so-called "Asset Protection Trusts" or "Family Protection Trusts". These are sometimes marketed as guaranteed ways to shield property from care fees but, in reality, they can be ineffective or even harmful. Many are offered by non-lawyers and unregulated companies. Not only can they be disregarded by the Local Authority, who will assess you as owning the property despite you not being able to have access to the funds to pay the fees, but your property will be included for inheritance tax purposes in your estate after you die - known as a “gift with reservation of benefit”.
Aside from potential challenges from the Local Authority, gifting property carries a number of other risks:
- If the person you gift the property to dies, divorces, or becomes bankrupt, the property could be lost – even if you’re still living in it.
- If your relationship with the recipient breaks down, you could find yourself in a vulnerable position.
Gifting property can also create tax problems. Your estate might no longer be eligible to claim the Residence Nil Rate Band (RNRB) and this additional, valuable inheritance tax allowance could be lost. Then, Capital Gains Tax may apply if the person making the gift does not live in the property. If the transaction is structured as a sale, even with a nominal payment, Stamp Duty Land Tax might be due, and, if you do continue to live in the home without paying market rent, the gift with reservation of benefit rules would also apply resulting in potential inheritance tax.
If you would like further advice, please contact Parker Bullen for more information.
Daisy Eshelby