Protecting the family home

Many people want their family home to pass to their children. However, many fear that the home will have to be sold to pay for their care should this be required or sold to pay their inheritance tax when they die.

This then leads many to consider giving their home to their children before they die in the hope that this will avoid inheritance tax and prevent the home from being used to fund their care costs. However, this can cause more problems than it solves.

Gift to the Children

When assessing your finances for care home funding, it can be established that a person has “deliberately deprived” themselves of their home to make themselves eligible for state benefits. The property would then still be included in the assessment. The assessment can go back indefinitely and would depend on the circumstances when the gift was made.

If you give your home away but still continue to live in the property, then it is still part of your estate when you die for inheritance tax purposes. The gift is caught by the “Gift with a Reservation of Benefit” rules and you are treated as though you have not actually given anything away. You could pay a market rent for living in your own home but then the new owner of the property would have to pay income tax on the rent received.

However, the problems do not end there. If you are no longer the owner of your own home, then your security of living in the property could be at risk:

• If your child predeceases you, the property will pass in accordance with their Estate.
• If your child divorces, your home will be included as part of their “matrimonial pot”.
• If your child becomes bankrupt, your home could be used to settle their debts.

You may believe that your child would not evict you from your home, but these events may be outside of your child’s control. You could end up with your property being owned by someone you did not originally intend to be the owner.

Tax issues

Other concerns involve the treatment of tax on the property. If the value of the property exceeds your tax allowance (current £325,000) and you die within 7 years of making the gift, then you risk incurring inheritance tax on the gift itself. Allowances that would have been available if the property were still in your estate when you die would not be available if the property has been given away during your lifetime. If the value of the property increases from the time of the gift to the date when it is sold, then capital gains tax may also be an issue.

Asset Protection Trust

If the property is transferred into a Trust, then there are other considerations as well. Trusts must now be registered with HM Revenue & Customs “Trust Registration Service” which is a system established so Governments can track what funds are being placed into Trusts, who controls those funds and ultimately where they are going. It also ensures that the Revenue can check that Trustees are submitting the necessary returns and paying their tax liabilities.

More information

If you are concerned about care home funding, you can speak with our Private Client team to discuss other possible options. It may be that your worries about inheritance tax and care home funding may not arise. If there is a risk of these issues arising then there are other alternatives that we can discuss.

This article was written by Kristian Croad, Senior Associate. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of March 2022.