Parents who are considering transferring the family home to their children to reduce inheritance tax (IHT) are being warned the move may not deliver the expected tax benefits they hoped.
Jack Robinson, a senior associate in the Private Client division at Midlands law firm mfg Solicitors, has issued the warning around the common misconception that transferring the family home to children and surviving for seven years means the property will automatically fall outside the parents’ estate for IHT purposes.
While the seven-year rule applies to certain lifetime gifts, it does not apply where the person making the gift continues to benefit from the asset. This forms part of HMRC’s ‘Gift with Reservation of Benefit’ rules.
Jack said: “People are generally familiar with the seven-year rule and understand that if they give away an asset and survive for seven years, the value of that gift can be excluded from their estate.
“However, what is less understood is the additional rules which apply where someone gives an asset away but continues to benefit from it. For example, if someone gives a painting away but continues to keep it on their wall, that could be regarded as a gift with reservation of benefit. The same principle can apply where someone gives away their home but continues to live there.”
For a property gift to be effective for IHT purposes, the parent needs to stop benefiting from it. If they wish to continue living in the property they would need to pay their children a genuine market rent.
Jack added: “Rent would need to be paid direct to the children, creating additional taxable income for them which could have income tax implications. There could also be implications for the children who have not yet purchased their own home. It’s also important to be aware that Capital Gains Tax may become relevant if the property is subsequently sold and has increased in value since it was transferred.
“It can be a real problem area and we’re seeing lots of people get into difficulties as they have not taken professional advice at the outset.
“This also includes a misunderstanding around the idea that giving away your home and surviving for seven years will automatically protect it from care home fees. That is not how the rules work. If a parent continues to benefit from the property the local authority is most likely to challenge this in court.
“There is also the risk that by transferring the property over to children the parent loses control and risks it being sold by their children should they go through a divorce, financial difficulty, or passes away. All these points could risk the house being sold during their occupation.
“Another key consideration is that gifting the house can cause adverse IHT consequences for the parent as they will potentially lose their Residence Nil Rate Band Allowance, which requires them to own a property at death and pass this on to their children.
“Importantly though, anyone considering gifting their home should seek professional advice before taking any action. The potential IHT saving needs to be weighed up against the tax, legal and financial consequences of giving up ownership of the family home.”
Readers wishing to find out more around the rules of gifting their family home can contact Jack Robinson at jack.robinson@mfgsolicitors.com or on 01952 641651 for further advice.
mfg Solicitors has offices in Worcester, Birmingham, Kidderminster, Bromsgrove, the Black Country, Ludlow and Telford.
