There may be good reasons for making the gift ranging from general affection, moral obligations to reflect financial or other contributions or to simply relieve the property ownership burden, which can be both financial and psychological.
However, the pitfalls should not be overlooked and there must be quite compelling reasons to proceed. The Donor is no longer free to move without permission or to raise capital against the property; the recipient may subsequently have financial difficulties (a mortgage advance or the sale proceeds may become irresistible!) the bankruptcy of the recipient would be a disaster; the recipient may divorce; the recipient may die prematurely and the home may then be owned by either the daughter in law who remarries or the feckless son in law!
There may be false hopes about saving tax and care home fees. The outright gift will normally be neutral for Inheritance Tax and a disaster for Capital Gains Tax.
An outright gift of the home is extremely unwise. A better form of gift would be for a life interest trust for the Donors with the property ultimately passing on death to nominated beneficiaries. This type of trust would at least give protection for the Donor’s continued occupation of the property against the dying, divorcing and bankrupt children as well as the taxman.
For Inheritance Tax there are limits on the value of property that can enter the trust, and for Capital Gains Tax the principal private residence exemption will normally apply. As to whether the gift will help avoid future care home fees, much will depend upon the circumstances at the time, the intention of the parties, the Donor’s health and the extent to which an individual Local Authority is prepared to pursue potential avoidance. There could be subsequent legislation which will override the effectiveness of the gift.
You should only proceed with the lifetime gift of the family home with extreme caution and detailed advice. As an alternative the property may be better protected by the use of trusts in Wills. The successful protection of part of the property may be a better option than a failed attempt to protect the whole!
For more information contact David Garfitt, Partner, Private Client by calling 01904 683121 or send him an
email.