The growth of house prices has come as a shock to many people, who discover in their later years that they are wealthy beyond their wildest dreams.
But this wealth comes with drawbacks. The taxman will help himself to a large slice of it when you are gone, while children and grandchildren cannot get on the property ladder. Some people try to solve the problem by gifting their home to the younger generation.
But it may not be as simple as it might seem.
You can give your property to your children at any time, even if you still live in it. But you need to be aware of the costs you could face.
Inheritance tax, or IHT is charged on your entire estate, and anything you leave above £325,000, would be taxed at 40%. (There are some exemptions, which might allow a family home of £900,000 to be inherited without IHT in the current tax year).
You could make an outright gift of the house. If you were to survive for seven years, there would be no IHT bill. But if you died within seven years, the property would fall back into your estate for IHT purposes.
This might look as though the sooner you sign the property over the better, but if you sign over your house but still live in it, this is regarded as a “gift with reservation of benefit.” This means the house will remain part of your estate on your death, even if you live beyond those all important seven years.
One way to get around this is by paying rent to your children. But a pound at Christmas will not do. It must be the market rent as charged for similar local rental properties. Your children will then be liable for income tax on the rent you pay them.
Capital gains tax
Capital gains tax (CGT) applies where a property is not a principal residence. It is not charged on the home you live in, but it could apply if your child does not live in the property when it is transferred. They could be charged on the increase in value when they come to sell it. This will also apply to a second home or holiday home. It is regarded as an investment, and CGT will be charged on any increase in value between first owning it and giving it away.
You could become homeless
Once you have signed over your property, you will no longer be the legal owner. This means that if you fall out with your children, or if they want to rent or sell the property or live there themselves you could be evicted.
Your children can do what they want – after all, it is their property.
Another scenario is divorce. Your son or daughter’s ex would have a claim against their estate, which would of course include your home. If your son or daughter was to become bankrupt, the property would form part of their estate, and at risk from creditors. If you outlive your children, the property will be passed on to their beneficiaries, which are unlikely to include you.
Your local council will charge if you go into a care home. They could view a transfer as “deliberate deprivation of assets” to avoid residential care home fees. They could reverse the transfer, to allow them to take fees for your care.
What should you do?
Signing over a property has tax and other financial implications. Seeking specialist advice before making any decision is essential. At Continuum, we can provide it.
The value of investments can fall as well as rise and you may get back less than you invested.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Estate planning is not regulated by the FCA.