Should I transfer my property to my children?
Many people believe that if you transfer your property to your children, it can reduce your inheritance tax liability on your death. There are many points you need to consider when transferring your property and a few are listed below.
1. Surviving gift by 7 years
If you make any gifts during your lifetime in excess of £3,000, you have to survive the gift by 7 years in order for the value of the gift to fall outside of your estate for inheritance tax.
If you do not survive the gift by 7 years, the value of the gift will use part of or all your Nil Rate Band (NRB) allowance which is currently £325,000. This is the amount you can leave on your death before it is subject to tax at 40%.
John transfers his second home worth £400,000 to his children. John dies 2 years later. John’s estate includes his main home and cash assets which total £500,000. As John did not survive the gift by 7 years, the value of the property uses up his NRB allowance. The estate then has to pay tax on £75,000 (remainder of the value of the property) and £500,000. This means that John’s estate is liable to pay £230,000 in inheritance tax.
2. Retaining a benefit
In order for the property to fall outside of your estate for inheritance tax, you must not retain a benefit from the gift. A benefit can include occupying the property free of rent or receiving the rental income.
For example, if you transfer 50% of your main home to your children, you will have to show that you have not benefitted from the 50% you have given away. This means that you may have to pay market rent to your children for the half you have transferred. The household bills will need to be split between you and your children and records will need to be kept to show that you do not own or benefit from half of your property. This can also increase your children’s income tax liability as they will be receiving the rental income for their share.
3. Outside of your control
If you transfer your property to your children, it will no longer be in your control. For example should your children’s marriages breakdown and end in divorce, the property will be a matrimonial asset and may need to be sold as part of the divorce proceedings. Likewise, if your children go bankrupt, the property may be claimed by creditors. This may be an issue if you decide to transfer half of your main home to your children. The whole property will need to be sold during proceedings which may result in you being homeless.
4. Capital Gains Tax
Transferring your property to your children is seen as a disposal for Capital Gains Tax. If it is your main property that you are transferring, you may be able to claim Private Residence Relief and which may result in no capital gains tax to pay. If you are transferring a second home, there is likely to be Capital gains Tax to pay on the increase of value.
5. Deprivation of assets
Transferring your property to your children could be seen by the local authority as a deliberate way to conceal your assets so you don’t have to pay care home fees. If the Local Authority can prove you deliberately disposed of your assets to avoid paying care home fees, they can reverse the transfer and the whole property will be taken into account for your care home fees.
Before transferring your property, you should seek advice from a solicitor to ensure it will benefit you and your family. There are a lot of tax implications on making gifts of property and you need ensure it will not result in you or your estate paying more tax than needed.
At Watson Thomas Solicitors, we can advise you on a number of methods which may help in reducing Inheritance Tax liability on your death. This may involve the creation of Trusts during your lifetime or the preparation of a tax efficient Will for you. If you already have a Will, we can advise you on whether there are any changes you ought to consider making to help reduce the inheritance tax liability of your estate on your death.