Giving your house to your children now.

Should it be done: Usually, no. Of course, it depends on the reasons and individual circumstances. 

Since 2007, married couples and those in civil partnerships have been able to transfer unused IHT allowances, making certain trusts far less attractive. Many now consider Inter-vivos trusts (Living trusts) the old-fashioned “snake oil” of Will-writing. This is because clients often do not appreciate the risks and are influenced by the benefits usually found elsewhere. 

Inter-vivos just means between the living, i.e., giving to a trust while alive rather than through your will when you are dead. 

Clients often tell us that either an advert on Facebook, usually with brightly coloured writing, or “Dave” down the pub said it is the best thing to do to avoid “well basically” everything from probate to care fees.

Clients even say that their parents had one; I ask: 

Q) Were they assessed for care home costs? A) No. 

Q) Did they pay market rates for rent? A) No. 

Q) Did they live elsewhere? A) No

Q) Did they record the frequency and reason for visiting the property? A) No 

Then, on the surface, they luckily only potentially wasted every penny spent on the trust rather than facing hefty legal and tax costs. 

There are two types of Living Trust. 

Revocable trusts can be cancelled or amended during the lifetime of the Grantor (the person giving to the trusts). However, they remain part of the grantor's estate for tax purposes. This is hardly an advantage because testamentary trusts (Will Trusts) can be used without risks.

Irrevocable Trusts cannot be modified without a consensus and/or a court order, as they are no longer part of the grantor's estate. This equates to a loss of control of the assets. Though they are more protected from creditors and inheritance tax, it is essential to title and transfer assets correctly to ensure that the trust protects them. 

Advantages of inter-vivos trusts. 

They can avoid the need for probate for all the elements correctly placed in the trust.

 Disadvantages/ risks of Inter-vivos trusts 

• If your adult child divorces, their share of your home is part of any settlement.
• If your adult child becomes bankrupt, your home may have to be sold to pay their debts.
• If your child needs residential care, the trust can be assessed to pay for their care.
• If you fall out with your child, you could be forced from your home.
• There may be insufficient assets to make gifts in your will.
• If you need care and your local authority thinks you only did this to avoid paying, they DO challenge it.
• The cost of the Trust can outweigh the cost of probate.

 TAX - This will be a second home for your children – meaning; 

• They could pay capital gains on any future sale.
• They pay Stamp Duty at a higher rate if they purchase an alternative home for you.
• You may face an immediate 20% charge on anything over £325k put in the trust, including anything gifted in the last seven years.
• Trustees have to submit tax returns to HMRC
• Every ten years, there is a further 6% tax charge (Over £325k)
• You have to pay income tax on any payments from the trust.
• There are also exit charges, often 20%, on assets taken out of the trust.
  
• If you continue to live in it, it is STILL in your estate for IHT purposes when you die.
• You have to pay the "market value" rent. Not the £1pcm that I often hear.
• Your children have to pay income tax and file tax returns for the rental income.
• You should record each time you visit the house, including how long, why, and more.

Please think carefully before taking this step. There may be much better ways of protecting your home. Gifting property during one's lifetime often arises in inheritance tax planning meetings. Gifting a property that you live in has pitfalls, and it is essential to know what they are before proceeding. 

The first question I always ask clients is what are you trying to achieve overall?

If the focus is on IHT, Remember that although it is an integral part of any sensible financial review, you are the most important person. Being financially secure is a very important part of our lives when we get older and may need care, and it is an enviable position to have options to maintain our quality of life.

Our homes are often our main asset, and therefore, it is important not to create a complex situation that causes problems for us either during our lifetime or after our death that could have been avoided by making a different decision.

Considerations

1) The gift with reservation of benefit rule. 

2) Legal implications of giving away all or part of an asset during your lifetime and the effect it will have on you;

3) Deprivation of assets for care fees and assessments. Which will be vital if you need care in future and might become unable to fund it yourself.

4) The immediate and ongoing costs of Trusts. A living Trust can often cost four or five times more than a Will trust.

What is a 'gift with reservation of benefit'?

It is often too simply said that if you survive seven years after a gift is made, the gift will be outside your estate for inheritance tax purposes. This is true, but if the gift is not really an outright gift - in other words, you continue to benefit from the gift or use the asset for your own purposes - then it isn't a gift at all. The title may have been transferred, but the asset remains under your control or for your benefit. Therefore, if you are considering such a move, steps will be needed to minimise this, which may not be as simple as it sounds. If you gift your home or part of your home to another person and continue to live in it as you did before, then a 'gift with reservation of benefit' will arise, and IHT will still apply.

Usually, if a gift is made to a third party who does not live with you, such as a family member during your lifetime, then you would need to pay them rent at market rates for the part or whole of the home that you have gifted for the entire time that you remain resident in it. This may be a costly monthly draw on your income. Also, the recipient would be taxed on the rent you paid them, which could give them an expensive tax bill. If you died within three years, then no benefit would arise, except that you would have paid out a lot in rent. Avoiding falling foul of the 'gift with reservation of benefit' rule can get even more complicated if you live with the child who received the gift.

What are the legal implications?

If you gift all of your home to someone else, then you would need protection to ensure that the house could not be sold over your head and you become homeless. 

Circumstances can change with family members: they can get into financial difficulty or become bankrupt; they can marry, divorce or remarry; they can fall out with each other and/or you. The position for the gifting party can therefore become very insecure. Even if you only gift part of your home, you are no longer the sole owner and cannot make decisions without the other party's agreement, which can be restrictive and cause worry during a period when you should be not troubled by financial and legal concerns.

What is 'deprivation of assets'?

Apart from potential tax and legal considerations, gifting assets whilst you are alive can be determined by your local authority to be 'deprivation of assets' for the purposes of care fees and assessments. This means giving away assets whilst you are alive to deliberately reduce the value of your estate to avoid funding your care and force your council to pick up the bill. It can apply to income as well as assets. The local authority's financial assessment for care will ask for assets you used to own. If it decides you deliberately gave them away to avoid care fees, it can disregard the gift, proceed as if you still owned it and recover the debt from those who received it. No seven-year rule applies here, and local authorities can look at gifts going back as far as they wish. Deprivation of assets is laid out in the Care Act 2014. Local authorities have been known to employ private investigators to check the websites of Will writers and Solicitors to see if they advertise the Trust as a way to avoid care fees. They also have subpoenaed bank records, solicitors records, and any info about the Trust.

Scenario Mrs Jones

Mrs Jones is a 70-year-old Widow who lives in a property valued at £900,000. Her daughter Charlotte also lives in the property. She has a son who lives with his wife and young family. Mrs Jones's estate is valued at approximately £1.5m (with pension), and she is keen to minimise Inheritance tax (IHT) when she dies. As a widow, £ 1 million of the estate would be free of IHT due to transferable allowances and property given to her children. She is considering gifting 50 per cent of the home to her daughter and has read that according to the HMRC website, as long as they both live in the property for seven years, then 50 per cent of the house's value when she dies would be inheritance tax exempt. She would leave the other 50 per cent of the property to her son in her will, with the remainder of her estate split equally between the two. Let's look at the bigger picture before returning to this scenario.

Because her daughter lives with her her circumstances are slightly different. Here is what to consider.

Ownership: The property would need to be owned as tenants in common, meaning they both own a fixed percentage of the house, for example 50/50, leaving her free to leave her half to her son. This differs from joint tenants, who both own the house 'as one'. In these circumstances, her share of the home would pass to her daughter under the survivorship rules; nothing in her will would override that.

Inheritance tax thresholds: As her share is being passed on to her son, the 'residence nil rate band' (RNRB) will still be available. 

IHT Summary (cover in more detail in other articles)

IHT of 40% is typically levied on a deceased person's assets worth over and above £325,000, called the nil rate band (NRB). Many people are allowed to leave a further £175,000 worth of assets without becoming liable for IHT if their home forms part of their estate, and they leave it to direct descendants. That means children, including adopted, step or fostered, and those children's linear descendants. This extra sum is what is called the residence nil rate band (RNRB). Both allowances (bands), add up to £500,000 per person. They can be transferred to a surviving spouse or civil partner if unused on the first spouse's death.

Capital gains tax: (CGT)

There is no CGT on any transfer of ownership to her daughter as Mrs Jones can claim 'private residence relief' (PRR). 

If her son's main residence is elsewhere, he would pay CGT on her share over and above the probate value on sale.

Gift with reservation of benefit: 

To minimise the likelihood of this issue being a problem, Mrs Jones and her daughter would both need to pay an equal share of the bills - council tax, electricity and gas, insurance, water and so on. She would need to be responsible equally for the cost of repairs and maintenance.

Daughter's future plans: 

She would need to consider that if her daughter moved out, Mrs Jones would need to pay rent at the market rate for her share, which could be costly on a house of that value. She could not sell the property if she needed to without the daughter's written agreement. If the daughter bought another property, she would pay a higher Stamp Duty Land Tax rate because she already owned a share in Mrs Jones's home. Nor could she claim first-time buyers' Stamp duty allowances or mortgage deals.

If her daughter's circumstances changed and she married, then she could be pressured to release capital for another house purchase. Should she marry, her spouse would, in effect, have a 50% stake in her share of the property, too, though that may not become a problem except in cases of assets being split in a divorce.

Care costs:

Even if Mrs Jones avoided the deprivation of assets issue explained above, her own share of the home would still be considered as part of any means test for care costs in the future, should your other funds run out. This can happen faster than you think at around £1,000-£1,500 a week for care home costs!

Legal advice: Mrs Jones would be strongly advised to see a solicitor to discuss creating a deed of gift. She would also need to demonstrate that she is paying your share of bills and repairs. She will need to ensure adequate protection in case her daughter's circumstances change. 

The daughter should make a will to determine what happens to her half of the house should she die before Mrs Jones. However, if she married, that would be automatically revoked, and she would need to make another if she wanted to leave her share with Mrs Jones.