For many people, their home is their main asset, and with rising property prices, some may wish to pass their property on to their family members. However, when gifting your residence, there are several things you need to consider, to avoid complications for you or your family.
If you give your property away but continue to reside there, then “reservation of benefit” rules may apply. You may be treated as owning the property for inheritance tax purposes unless you pay rent to the recipient of the gift. Many people worry that inheritance tax will be payable on their estate but don’t realise the introduction of the transferable nil rate band and residence nil rate band mean certain estates will be exempt from inheritance tax in the future.
Capital Gains Tax
If you gift or sell your main residence, then you should not be required to pay capital gains tax on any increase in the value the property may have. However, if you gift your property to someone who doesn’t live there, they may incur a capital gains tax liability if they later sell it and its value has risen.
The “Pre-Owned Assets” rules are complex tax rules that are frequently overlooked yet can apply in some situations. For example, if you sell your house and gift the sale proceeds to your children, who then later buy a property where you can live, then you may need to pay income tax which is calculated on market rent.
Care Home Fees
If you gift your property and then move into residential care, you may risk your local authority arguing that you have deliberately deprived yourself of an asset to avoid paying care home fees. They may try to take back the gift.
Your home might be your financial security in the future, and once you have gifted it away, even to a family member, you can no longer use it to raise capital for yourself through an equity release scheme or by downsizing. You may have to rely on the generosity of the receiver of the gift, and if something happens to them, you could become at risk.
Think carefully and ask advice from a solicitor before gifting your home to someone. If the home is gifted in your will, other rules also apply. Take a look at our other posts on legal advice for the elderly.