For many, the family home is the most valuable asset they have. This leads some people to consider gifting their house to their children during their lifetime, to reduce the value of their Estate for inheritance tax, and to protect the house from care fees. But does this work?
Gifting your property
If the entire property is gifted, to be effective for inheritance tax you must pay a full market rent to continue living in the property, as well as survive the date of the gift by seven years. Your children will be subject to income tax on the rent received and there may also be Capital Gains Tax issues if the house is sold in the future.
An alternative is to gift only part of the property but to be effective for inheritance tax purposes your children will need to occupy the property along with you. The joint occupation does not need to be constant, but there must be some joint use of the house.
There is no guarantee that by gifting the family home you will protect it in the future from care fees, as there are anti-avoidance measures which can allow Local Authorities to look through such arrangements.
You should also consider that if you need care but do not have the resources to fund it because of the gift, the Local Authority may only fund the basic level of care. You would then have to rely on your children to provide financial support to enable you to move into a home of your choice.
You should also bear in mind the possibility of a breakdown in your relationship with your children, or your children going through a separation or financial difficulties of their own, which could result in the house having to be sold, leaving you with nowhere to live.
In short, you must think carefully before deciding to make a gift of your property and take specialist advice to ensure the gift is effective for inheritance tax and does not leave you in a vulnerable position.