Associate solicitor Kirsti Harvey, in our Wills, Probate Tax & Trusts team, provides an answer and explains the Inheritance Tax and other implications.
This is one of the most common questions we hear when discussing Estate planning with clients. Gifting property to children seems like a simple way to mitigate Inheritance Tax (IHT), especially if they are to be the ultimate beneficiaries of your Estate. However, it isn’t as straightforward as it may initially seem.
Gift with Reservation of Benefit
Whilst you are entitled to give away your assets during your lifetime, to be effective for Inheritance Tax planning purposes it must be a true gift without any strings attached. Otherwise, it will be classed as a “gift with reservation of benefit” (“GROB”) and will still form part of your Estate for Inheritance Tax purposes. The prime example of a GROB is where parents “gift” their home to their children by transferring the legal ownership to them however, they remain in occupation. As you would still be receiving a benefit from the property i.e. occupying it, it would be considered a GROB and not a true gift.
To escape the GROB provisions you would need to either vacate the property or pay an open market rent which must be kept under annual review. You would need to decide whether you are comfortable having a commercial arrangement with your children as well as carefully considering your finances to establish whether you have sufficient income and/or capital to afford this.
Other Considerations
Regardless of the Inheritance Tax consequences of gifting your property, you should also bear in mind that there are other issues to consider:-
- Lack of security
The property would be their asset and theirs to do with as they wish. Whilst you might trust your children to allow you to remain in the property, it is possible that relationships can change over time and you would not have the security of being able to remain in the property. Your children could choose to sell it or rent it to someone else, or to give it away without any consultation with you.
- Income Tax and Capital Gains Tax
There would be Capital Gains Tax implications both for you and for your children and your children would also have to declare the rental income received.
- Bankruptcy
If your children were to be declared bankrupt then the property would form part of their Estate which will vest in the Trustee in bankruptcy.
- Divorce
The property would be their asset and would be considered in financial agreements in divorce proceedings.
- Death
Should your child predecease you, the asset would form part of their Estate. It would therefore pass under the terms of their Will or, if they did not make a Will, the Intestacy Rules. The property might therefore pass to someone that you did not intend to benefit.
Care Fees and Asset Protection
We are also regularly asked whether a property can be gifted so that it is not included in the Estate for assessment of care fees. This is a complicated subject, and one that will be covered later in this series of blog articles, but lifetime gifts would be subject to scrutiny by the local authority and likely to be considered a deliberate deprivation of assets.
Our specialist Wills, Probate, Tax & Trusts team can provide expert advice on Wills and estate planning, including in relation to trusts and lifetime tax planning.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
