Making a Gift of Your House to Your Children: Understanding the Risks, Pitfalls, and Inheritance Tax Implications from our Wills Solicitors in Lancaster
Posted on 21st November 2023
When considering the future of your estate and the well being of your children, gifting your house can seem like a generous and straightforward way to pass on your most valuable asset. However, this decision involves a complex interplay of legal and financial considerations, as well as a potentially heavy burden on your interpersonal relationships with your children. For those in Lancaster, consulting with experienced Wills Solicitors and Probate Solicitors can provide invaluable guidance before you make the decision to make such a gift. In this blog, our Wills Solicitors in Lancaster explore the key aspects of this process, including the potential risks, pitfalls, and inheritance tax implications.
Understanding the Legal Framework
Firstly, it’s crucial to understand that transferring property ownership is not a simple transaction. In Lancaster, as elsewhere in the UK, several legalities must be considered. Wills Solicitors in Lancaster can advise on how such a gift fits into your overall estate planning, ensuring your wishes are clearly articulated and legally sound. The parties must also consider other implications, such as Stamp Duty, Capital Gains Tax, and even potentially Income Tax.
Inheritance Tax Implications
Inheritance Tax (IHT) is a significant consideration before making any gifts during your lifetime. If you gift your house but continue to live there rent-free, it may be considered a ‘gift with reservation of benefit’, and therefore would still be part of your estate for IHT purposes. The rules around this are complex, and the advice of a qualified Probate solicitor is essential to navigate these waters effectively. However, as a word of caution, you could still end up paying Inheritance Tax on the value of the property in your estate, even if you do not actually have the equivalent amount of cash. This may sound confusing, but the rules were created by HM Revenue and Customs to prevent people simply gifting away their property, and then still continuing to essentially have full beneficial ownership of it, to avoid paying tax after their death.
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The Seven-Year Rule
Another critical factor is the seven-year rule. If you survive for seven years after making a gift, it is usually exempt from IHT. However, if you pass away within this period, the house may still be considered part of your estate for tax purposes, even if taper relief would apply. Even if you do survive for more than 7 years, this is not an absolute guarantee that your house would be disregarded from IHT, as can be seen in the example above.
Potential Risks and Pitfalls
Future Financial Security
Gifting your house affects your future financial security. Once the property is no longer yours, you lose control over it. This could be problematic if your circumstances change, for example, if you need to fund long-term care.
In addition, such a gift can be viewed by the Local Authority as a deliberate attempt to avoid paying for your own care fees and, as such, they do have the powers to overturn the gift, and still use the funds to pay for your care. Also, even if you don’t require care, as your children (or other people) will be the legal and beneficial owners of your property, if you want to sell and move, or sell and spend the money on holidays, you don’t have any say in this; the property is no longer yours.
You may think that this wouldn’t matter, and your loved ones would let you sell the house and spend the money, however, it isn’t that simple. This would involve gifts from one person to the other, which could impact all your Inheritance Tax- and other tax- positions.
Relationship Changes
Relationship dynamics can change. Whilst many of our Wills Solicitors in Lancaster’s clients assure us that their children would never kick them out of the property, and they would never fall out with their children, we have seen it happen. It is not nice to think about, at all, however, it is reasonable to say that you cannot say it will never happen to you.
Your Loved One’s Circumstances
If you gift your house to your children or other loved ones, and their circumstances alter, such as through divorce or financial difficulties, your property could be at risk. Many people haven’t considered these circumstances when they approach our Wills Solicitors in Lancaster to discuss making a gift of their property.
However, a common issue could be a divorce of your loved ones; the property you have gifted to them would be included in any calculation of financial settlement, meaning your house may need to be sold. Further, if your loved one goes bankrupt, the house would be their asset, meaning it would be sold to pay back their creditors. Your loved one could also do other things, such as charge finance against the property without your knowledge, meaning that the available equity is less; it could prevent you moving in the future.
Market Fluctuations
The property market is unpredictable. The value of your home at the time of the gift may be different from its value when you pass away, impacting the overall estate value and potential IHT liability.
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Gifting your house to your children is a decision that requires careful thought and professional advice. Instructing Wills Solicitors in Lancaster for advice can provide peace of mind, ensuring that all legal and tax implications are thoroughly considered. Remember, every situation is unique, and the right approach depends on your individual circumstances and goals.
Planning for the future of your estate?
Consult with expert Wills Solicitors in Lancaster to navigate the complexities of gifting property and ensure your loved ones are protected. Contact us, below, to arrange an appointment to discuss your estate, and consider the full circumstances, before committing to such a generous gift.
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