Can I give my main residence away to my children?

This is probably one of the most frequent questions we are asked. The main reasons given are to save inheritance tax or to protect the property against having to pay care home fees.

In general terms if you give away money or assets to your children during your lifetime, then in order for it not to be counted as your asset you need to survive 7 years. So on the face of it, it seems that you could transfer your property to your children, survive 7 years and for most people their most valuable asset is not counted as part of their estate for inheritance tax purposes? Unfortunately not!

What is a gift?
According to HMRC website “- a gift can be:
• anything that has a value, such as money, property, possessions
• a loss in value when something’s transferred, for example if you sell your house to your child for less than it’s worth, the difference in value counts as a gift”

Many of you may have heard of the 7 year rule in which any gift made is discounted from your estate for inheritance tax purposes if you survive by 7 years. This is known as a Potentially Exempt Transfer (PET).

Inheritance tax
The Finance Act 1986 introduced anti-avoidance rules to stop people giving away assets in which they continued to receive a benefit. These gift with reservation of benefit rules means that if you continue to live in the property or give it away with conditions then this will be classed as a gift with reservation of benefit, so unless you pay a market rent to the new owners (i.e. your children) and pay your share of the bills then on your death it will still be counted as your asset for inheritance tax purposes.

If you have a second home that you do not live in but pay rent out to receive an income, then you could transfer that property to your children. If you do so, then you cannot continue to receive the income as again that would be seen as reserving a benefit. You could decide that you only need half the rental income and transfer half the property to your children. You could then receive half the income from this second property and this would be a successful PET, provided you survived 7 years. Please note however that whenever you make a disposal of a property that is not your main residence, there may be a capital gains tax charge between the value of the property when you bought it and the value at the date you made the gift (the disposal).

A gift of a property which does not qualify as a potentially exempt transfer could be subject to this lifetime charge of inheritance tax at 20%

Care Home fees
If you give away your home or any assets with a view to avoiding them being taken into account for care home fees funding, then this could be seen as a deliberate deprivation of assets. The local authority may view those assets still belonging to you and this will have an affect on the financial assessment they carry out. Local Authorities also have powers of recovery so that if you gave away your property to your child and then the local authority has to fund your care, they can seek to recover those care costs from the children who received the property.

Timing is a key issue in relation to these gifts. If you transferred the property many years ago before you could reasonably expect that you would need care and support, then it unlikely to be seen as a deliberate deprivation of assets. However please note there is no time limit as to how far the Local Authority can go back.

Other risks
Once you give something away, you no longer have a say what happens to it. Your children can then decide to sell the property, charge you rent or take out mortgages on the property. It could also be at risk of your children were to die, divorce or become bankrupt.

Some examples
Example 1 – Adult child lives at home with their mum. The property is valued at £300,000. It is likely that the child will continue to live there long term. It may be sensible for mum to give away one half share of the property to that child. Mum and child share the bills. Mum survives 7 years. The gift of the half share is effective so that only mum’s half of the property is counted for inheritance tax purposes.

Example 2 -Mum and Dad give away their property to their children in 2010. They continue to live in the property until 2014 and then move out. Between 2010 and 2014 the property is a gift with reservation of benefit. Once the parents move out the clock on the PET starts to run, so as long as they survive to 2021 it will not be counted as part of their estate.

Example 3 – Dad gives him property away to son who does not live with him. Dad continues to live in the property and then dies 10 years after making the gift. Dad is still considered to own the home for inheritance tax purposes.

Example 4 – Mum decides to transfer property to her children as she wants to ensure they receive their inheritance in case she has to go into a care home in the future. Mum is in good health. 15 years later she has a severe stroke and needs to go into a care home. The transfer of the property was made for the purpose of avoiding care home fees in the future. The Local Authority will treat mum and still owning the property and this will affect the financial assessment and they may refuse to pay for care. If they do pay for care, they can recover the costs of that care from the children.

If you would like any further advice or guidance on the issues raised above then please do not hesitate to contact Esther Janalli-Brown on 01306 884432 or email for more information.