Gifting your home – is it a good idea?

You may have many reasons for making the decision to gift your home to your children or other family members. However, it is important to factor in all costs and considerations before you do so, some of which may not be immediately apparent – but could have unintended consequences when thinking about passing over ownership of your home.

You may want to financially secure your family’s future as much as you can while minimising any potential tax liability. So-called ‘estate planning’ is becoming commonplace, particularly during a time where increasing house prices are pushing up the total value of an individual’s wealth.

The law allows you to give your property to children or other family members, even if you wish to continue to live in it. However, gifting your home may not be as straightforward as you think. Essentially, the position differs depending on whether you intend to carry on living in the property after you have made the gift.

Making an outright gift of the house to your children to reduce the value of your estate would be treated as a ‘potentially exempt transfer’ for the purposes of inheritance tax (IHT).If you were to die within seven years of the date of making the gift, the property would fall back into your estate for IHT purposes and would become ‘chargeable consideration’ for IHT purposes. –.If, however, you went on to survive for seven years after making the gift, the gift would fall outside of your estate and there would be no IHT liability.

By making the gift, you also give up the right to receive any rental income from the property or any share in the proceeds of sale if the property is sold.

If you gift your house but remain living in the property, this is treated as a ‘gift with reservation of benefit’. This situation occurs where an asset is gifted to another person but is still being used by the original owner. From a tax perspective, the property will remain part of your estate upon your death for IHT purposes, leaving your children or family members potentially exposed to liability.

One way around this is to pay a full market rent for your use of the property after you have gifted it. In this situation, your children or family members would be liable for income tax on the rent you pay them.

You also need to be aware that, once you have gifted your home, you will no longer be the legal owner of it. This means you will have no control over what your children or family members choose to do with the property.

If you continue to live at the property, but have a disagreement with your children or family members, in a worst-case scenario, you could be evicted. There is also the possibility that married children could divorce and they may be forced to sell the home and share the proceeds with their former partner as part of a settlement in a divorce.

Other avenues to explore could be to sell your home and gift the net proceeds to your children when you have bought a smaller home. However, you would still need to survive the gift by seven years for the gift to fall outside of your estate for IHT purposes.

Another option to think about would be to gift a share of the home to family members so that you jointly co-own the property and live in the property together.

Finally, you will need to consider other charges which may be applicable, such as capital gains tax, and you must ensure the local authority will not view the gift as a direct attempt to reduce your assets in order to avoid payment of care home fees.