The recent story of a mother who gifted her property to her daughter, during her lifetime, demonstrates the risks of doing so. 

The news article explained that Norma Gibbons transferred her £1.4 million home into her daughter’s name for “Inheritance Tax reasons”.  However, after a falling out between them, Norma was forced to leave her own home.  After lengthy court proceedings, it was ruled that possession of the property should be given to Norma’s daughter, leaving Norma homeless.

The main reasons that people decide to gift their property to their children are to try and reduce the Inheritance Tax payable and/or to avoid paying for care home fees. Before making a gift of your property, you should consider the following:

Inheritance Tax

Many people believe that gifting their property to their children will allow them to avoid paying Inheritance Tax when they have passed away, provided they survive a further seven years.  Nevertheless, if you continue to live in the property, without paying a market rent, it will be deemed as a gift with reservation of benefit and the value of the property will be treated as part of your estate. Therefore, you may be liable to pay Inheritance Tax. 

Capital Gains Tax

Another risk when gifting your property during your lifetime, is that it could result in your children paying Capital Gains Tax. This is because there is a potential tax liability on the difference between the value of the property at the time that it was gifted to them and the value of the property at the time of the sale. Although there are some reliefs and allowances available, you should be aware that this is a possible outcome of gifting your property while you are still living. If you were to gift the property to your children on your death and it was to be sold soon after, there should not be any Capital Gains Tax to pay.

Residential/Care Home Requirements

If you need residential care in the future, the Local Authority will take into account your income and capital over £23,250 to determine whether you should pay for the costs of your care. Even if you have gifted your property to your children and you do not legally own it, the Local Authority can determine this as a deliberate deprivation of assets and will take the value of the property into account. They will then look to your children to cover the costs of your care home fees, due to them receiving the gift. This means it is likely that your property would have to be sold to cover the costs of your care anyway.

Death

If your children pass away in your lifetime and they own your property, the property will pass into their estate, meaning it will go by their Will or intestacy. This could be detrimental to you as the property would now be controlled by the beneficiaries and you would not have any legal entitlement to it. Your children could make a Will leaving the interest in the property to you or giving you a right to reside in the property for the rest of your life; however, they would have no obligation to do this as the property would legally be theirs to distribute with as they wish.

Divorce

Another concern is that your children may go through a divorce. This means that any assets in their name have would to be taken into account during divorce financial proceedings.  This would be a disadvantage to yourself as it could result in your property being given to your child’s ex-spouse. It would also have a negative impact on your child as it increases the value of their assets and could lead the court to favour their ex-spouse when determining the outcome of the settlement. This can also potentially occur if an unmarried relationship breaks down.

Bankruptcy

Unfortunately, your children may come into some financial difficulties, such as becoming bankrupt. This could mean that their Trustee in bankruptcy may have a claim against your property and you may have to start paying rent to continue living there. Although your own child may not become bankrupt, there is still a risk if their spouse does. This is because your property would have the potential to be offered as security for a loan, meaning you would then be under the control of your son/daughter-in-law’s secured creditors, with regards to your property.

Furthermore, there are risks to your children if you become bankrupt, after gifting them the property. The Insolvency Act 1986 says that if a person gifts a property and then becomes bankrupt, their Trustee in bankruptcy can claim the property within 5 years of the gift being made to a third party. This would result in an insurance policy being taken out and your children would have to fund this.

What should you do?

Ultimately, it is your decision as to whether you feel it is right for you to gift your property during your lifetime. However, due to the reasons outlined above, it is vital that you seek legal advice before doing so. It is clear from Norma Gibbons’ story that these risks do occur, and you should consider them carefully as they could result in significant, devastating effects for you and your family. 

Given the risks, we would usually advise clients to take steps in their Wills to protect their property for their intended beneficiaries. If you would like to discuss your property and your Will with one of the team, please do not hesitate to contact us. Call 0800 138 0458 or email help@switalskis.com