If you are facing the possibility of having to fund care home fees or are concerned about there being an Inheritance Tax (IHT) liability when you die, it may be tempting to think about gifting your house to your children, so that when the day comes, it is out of your estate. In many cases, however, this will fail to produce the desired result. Here’s why…
If you gift your house to your children but continue to live in it, then the gift will normally be a ‘gift with reservation’, which means that the property will be treated for IHT purposes as having never left your estate. If, however, your children dispose of the property, any increase in value after the gift to them has been made will normally make them liable for Capital Gains Tax (CGT) on the increase. If you retain it, the increase will be free from CGT if the property is your principal private residence.
Similarly, if you give your house to your children, your local authority may still take account of the value of the house when assessing your contribution to your long-term care costs.
Other points to consider before relinquishing ownership of your property are:
- If you wish to raise funds for whatever reason, you will not be able to obtain a loan based on the equity you had in the property;
- If a child divorces or is made bankrupt, you may lose the property, which may also happen if the property is used as security for a loan on which the borrower defaults;
- If your children need cash, they may exert pressure on you to leave the property so that it can be sold; and
- If your child predeceases you, their beneficiaries will be the new owners and may prove to be more difficult to deal with.