I’m thinking of gifting my home to my son to avoid inheritance tax – but would that give them the right to evict me?
Gifting your home to child: What are the potential benefits and pitfalls of doing this? (Stock image)
Tanya Jefferies, of This is Money, replies: The danger of getting kicked out of a home you gave away is highlighted by an ongoing court case.
A pensioner is locked in a legal dispute with his son to avoid having to move from a house he gifted to him eight years ago.
In another case, a multi-millionaire couple in their eighties have been barred from a Cotswold mansion by their children following a legal conflict over a family trust.
So could you end up being evicted from a property you once owned if you give it away?
Peter King, partner and head of the wills, probate, and tax & trusts team at Nockolds, replies: Yes, you could!
If you are considering gifting your house to your child, as with any gift of assets, you have to be clear about what you are trying to achieve.
A reduction in inheritance tax for your children? Avoiding the payment of care home fees? Making sure that children inherit a home rather than a second spouse or partner? Making sure step children won’t get their hands on the family home?
Peter King: ‘There are many dangers in giving away assets, let alone anything as precious as your home’
Suffice it to say, there are many dangers in giving away assets, let alone anything as precious as your home.
Of course, many people give away assets without having taken any advice, or perhaps not having thought through the likely consequences of their actions.
Not surprisingly, there are anti avoidance provisions in the tax and social care laws that often mean the gift ‘doesn’t work’ as intended.
The law also protects dependant partners and children by allowing them to claim against an estate when no provision is made for them.
Often the intention behind the gift is motivated by a misunderstanding as to what it will achieve, or in the belief that the beneficiary will behave in a particular way as a result of it.
As a solicitor in practice, I can tell you that these misunderstandings are widespread. It’s not surprising that the Law Society issue detailed guidance to solicitors who are asked for advice in relation to gifts.
First and foremost, the solicitor has to identify his client, and advise that person – the donor, not the recipient or ‘donee’ – and of course there must not be undue pressure on a donor to make a gift.
The solicitor cannot act for more than one party to the arrangement and will advise other parties to take independent advice, and the risks of going ahead without it.
Solicitors must also establish the donor’s objectives and full understanding. They must advise on all the potential consequences and suggest alternatives. For example, sometimes the gift can be more easily achieved through a will.
If the donor’s intention is to make the gift to avoid inheritance tax, they must be advised if the objective can be achieved.
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Find out how to minimise the amount of your estate that goes towards taxation here.
For example, if the donor continues to live in the gifted home, then there may be no inheritance tax saving. The gift can also trigger capital gains tax.
The Law Society acknowledges: ‘Some clients may have received advice from non-solicitor legal advice services that included unjustified claims about gifting of assets to avoid the assets being considered for inheritance tax or care fees liability.’
Make sure you get proper advice before you dispose of your most important assets. If not, you too could be disappointed or even ‘booted out’.
The potential benefits – no outcomes can be guaranteed – and risks are summarised below.
Potential benefits of giving away assets
* There may be savings in relation to inheritance tax and administration costs upon the death of the donor.
* The donor may avoid the need to sell assets to pay for care fees.
* The asset may not be taken into account if the donor has to undergo means testing for benefits or publicly funded services.
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* The donor may be relieved of the burden of responsibility for the asset.
* It could reduce delays in processing the donor’s estate on their death.
Risks of gifting your property
* The value of the home may still be taken into account or become relevant in the context of funding long-term care, as there are anti-avoidance measures in relation to means-testing.
* If the donor subsequently needs to move into a care home but does not have the resources to pay for their care themselves because of the gift, the local authority may only pay for the basic level of care, leaving the donor to rely upon the financial support of others to enable them to move into a care home of their choice.
* The donee may not provide the support expected, resulting in suffering for the donor – for example, by not topping up care fees, or by moving the donor prematurely into a residential care home in order to occupy or sell the family home.
* If the donee dies or runs into financial difficulties, or the donee gets divorced and has to divide assets with their ex-spouse, and the donor continues to live in the gifted home, the donor may be made homeless.
* The relationship between the donor and donee might deteriorate, since parties can and often do fall into dispute, and even become quite hostile to one another.
* The donee may later put pressure on the donor to sell the gifted assets.
* If the donor transfers their home, they may be deprived of opportunities to adapt to changing circumstances – for example, by downsizing, or releasing equity to pay for adaptations or care at home, so the donor may be left with no option but to move into a care home.
* The donee may lose their entitlement to benefits and/or services based on personal means testing.
* If the arrangement is challenged, there could be additional legal fees.
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