Many people are concerned about ensuring that they leave as much as they can for their loved ones. Their main fears are that care home fees or inheritance tax is going to reduce what they have so that they are leaving less of their hard-earned estate for their family.
This then leads some people to think that if they give their home (which is usually their main asset) to their children during their lifetime then care home fees and inheritance tax can be avoided. Right?
Unfortunately, it is not as simple as that.
If you give an asset away with the purpose of avoiding care home fees, then there is a risk that if you needed to go in to care then you will be assessed as “deliberately depriving” yourself of your home. If a finding of “deliberate deprivation” is made, then you will be treated as though you still own the property and have to pay for the cost of your care anyway as though you still owned it.
If you continue to live in the property, H M Revenue & Customs may consider that you have not actually given anything away. The gift of the property is treated as a “gift with a reservation of benefit”. This means that on your death, you will be subject to inheritance tax as though you still owned the property even though it is in the name of someone else.
There are then the added risks that you no longer own the property. If something happens to the person whom you gifted the property to (death, divorce or bankruptcy to name a few) then the security of your own home is at risk. There is also the risk that if you the person you gave the property to suddenly wanted to, they could charge you rent or evict you from your own home!
The risks are not only for you but also to the person receiving the property. They would own an interest in a property which means that there could be tax implications for them as well. When the property comes to be sold, the acquisition value will be the date of the value of the property when it was gifted to them. Any increase in the value of the property will then be subject to Capital Gains Tax when the property comes to be sold.
To avoid some of these risks, some “advisers” suggest transferring your home into a Trust during your lifetime. The Trustees will then be the new owners of the property. The terms of the Trust can state that only you can live in the property so you cannot be evicted.
This does not change the fact that H M Revenue & Customs will still treat you as not actually giving anything away. You have retained the right to live in the property so you will be subject to inheritance tax on your death as though you own the property.
The additional issue is that the creation of the Trust means that it must be registered with H M Revenue & Customs’ “Trust Registration Service” and your home is now subject to a special tax system known as the “relevant property regime”. This tax system means that there will be a potential immediate tax charge on anything going into the Trust (A tax charge of 20% of the value of the asset going in over the inheritance tax allowance known as the nil rate band – currently £325,000), reporting obligations and potential charges every ten years from when the trust was created and when the trust comes to an end there are charges to get the funds back out again.
This is not suitable for the majority of people.
However, there are alternatives. Instead of creating the Trust during your lifetime, it is possible for a married couple to create a trust in their Wills. In the event of one of them passing away, instead of their estate passing to the survivor, their share of the property could pass into a Trust at that time.
This means that if the survivor goes into care, then whatever belonged to the first to die can be ringfenced and protected from the survivor’s care fees. It also means that any reporting obligations to H M Revenue & Customs are not required until when the first of the couple passes away.
The added benefit is that the person making the Will also has control where that asset passes in the event of the death of the survivor. This can be very useful for second marriages and blended families.
If this is of interest, then please contact our Trusts team who you can discuss your circumstances with and what you are trying to achieve. We can then advise you of your available options so that you can make the right decision for your situation.
The above is meant to be only advice and is correct as of the time of posting. This article was written by Kristian Croad, Senior Associate in the Trusts team at Pinney Talfourd LLP Solicitors. 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 October 2023