Giving your home away to a family member to save on care home fees or Inheritance Tax is complex and can have very serious consequences, as partner Sarah Cornish explains.
Gifting your home to a family member is not as straightforward as you might imagine. There are several important questions you need to ask before making such a major decision.
We often see clients who are thinking about this move in a bid to avoid having to pay care home fees in the future or prevent having to pay Inheritance Tax, or both.
At Coodes, we cover a whole range of issues with our client first, so they have all the facts to hand before embarking on a potentially life-changing choice. Here are some of the key considerations you will need to make:
Will I still need to pay for care home fees if I give away my home?
If you give away your property and the sole, or one of the main reasons, is to avoid care home fees, there are rules which the Local Authority must follow. The most important thing to understand is the Local Authority may decide the property’s value should still be considered if you require care home funding in the future.
These rules are quite complex and technical, but one of the key points to note is that if the Local Authority establishes that the sole or main aim of making the gift is to intentionally deprive yourself of capital to avoid paying care costs, it could mean the asset is still taken into account and funding is refused.
What happens if I need residential care?
If the Local Authority decides that your intention was to create or increase your entitlement to means tested benefits, it could refuse to provide any financial assistance towards care home fees.
Although the Local Authority may still be obliged to provide care for you, this could result in a debt against you. This means you could eventually face insolvency proceedings and be declared bankrupt. If this is the case, the trustee in bankruptcy could undo any gifts that you have made at a later date.
You should also keep in mind that the Local Authority may only apply a basic level of funding. This may mean that you cannot move into, or stay, in the residential home of your choice and may need to live somewhere cheaper instead.
What happens if the person I give my property to dies first?
If you make an outright gift of your property and the person receiving the gift, perhaps your child, dies before you, their share of your property will pass either in accordance with their will or under the intestacy rules. This could mean that a son-in-law or daughter-in-law or even a grandchild could own your home.
Although you may get on well with your in-laws, they might remarry and then someone who is a stranger to you may own your property.
What happens if the person receiving the property gets into financial difficulty?
If you give your property away and the recipient of the gift gets into financial difficulty, the property would form part of that person’s assets. It could then be considered in any bankruptcy proceedings.
What happens if the person receiving the property divorces?
If the marriage or civil partnership of the recipient of the gift sadly breaks down, the property would form part of their assets. This could then be considered in any divorce or dissolution proceedings.
This means that all, or part of the property could be awarded to a spouse or civil partner, or it could mean that the property may need to be sold.
What happens if we have a disagreement?
Unless you have put an appropriate agreement in place, if you and your family member have a disagreement in the future, they could effectively evict you from your property.
If you have given your property away as an outright gift, then it is normally irrevocable. This means that you cannot assume that your property would be returned to you.
Will I still need to pay Inheritance Tax on the property if I give it away?
If you give an asset away but continue to receive any benefit from it, then this may be classed as ‘gift with reservation of benefit’ for Inheritance Tax purposes.
This means that HMRC could decide it still forms part of your estate for Inheritance Tax purposes, even though you have given the legal title away.
If you do decide to give your property away but want to continue living in it, you would need to pay a full open market rent to the person receiving the property for your continued occupation. The rent would need to be regularly reviewed, as it would be an arm’s length transaction.
More help and advice
If you are looking at giving away an important asset such as your home, you should take expert legal advice.
Our specialist wills, probate and trusts team can help with this – you can contact them by completing the online form or by calling 0800 328 3282.