Warning over pitfalls of passing on your home to your children
Homeowners are being warned about the risks of signing their homes over to their children as the housing market improves.
Alison Craggs, a solicitor in our Tax and Succession team and a member of the Society for Trust and Estate Practitioners and Solicitors for the Elderly, says the improving property market has seen more parents looking for ways to pass their homes to their sons and daughters – often in an attempt to reduce the burden of inheritance tax.
But she warns that some may not be aware of the complexity of the process of “keeping it in the family” – and the risks that go with it.
She says: “There are three main motives for parents looking to transfer ownership to their children. All three are in response to the world we live in today and all three may become even more of an issue as we head out of the recession if house prices begin another rapid ascent.
“The first major motive is concern over paying for care home costs in the future when, for many of us, our home is the only significant asset we have invested in over the decades.
“The second is an attempt to avoid Inheritance Tax which, with houses being worth more, is an issue for many more of us than it was 25 years ago.
“The third is again a symptom of high house prices – that parents understandably want to be able to give their children a foot up on the housing ladder.”
Some believe that transferring ownership of their homes to family members can help them avoid the property value being taken into account when they are assessed for care home fees.
But Alison warns that if a local authority can prove that a significant motive of the transfer was to get financial help with care home fees then they can still include the property in their assessment.
Tighter budgets mean local authorities are increasingly vigilant, thoroughly investigating the timing and motives of property transfers. It is a misconception that they can only look back a few years.
For those who take the risk, they are left with the fact that in protecting their asset, they have left themselves exposed with little income to pay for their care when the time comes. And because they are relying on the local authority to provide their care, they will have less say in their choice of home.
People who transfer ownership of their home but continue to live there are also advised that this is not a way to avoid inheritance tax. The property would be covered by the “gift with reservation of benefit rules” – meaning that upon your death the house would be deemed to be back in your estate.
If you or your children are later forced to sell the house then Capital Gains Tax may be due on the increase of the value of the property between the gift and the sale.
Alison adds: “Those who are thinking of transferring ownership to help their children on the property ladder should remember that transferring ownership really does mean giving away your home and having no legal control of it in the future.
“Most people who have home ownership questions come from families who respect and get on with each
other – but the situation today may not be the situation of tomorrow. We see many families who have fallen out and the implications can be enormous financially as well as emotionally.
“Once you hand over ownership you are at the mercy of your family – and of course their spouses and their families too. There are a number of scenarios which pose risk in these circumstances.
“Financial difficulty is a common problem. If your son or daughter becomes bankrupt then your home will have to be sold to offset the debts. If they mortgage your property, with or without your consent, and then fail to keep up the mortgage payments, then repossession of your home may become an issue.
“Similarly, if the couple divorces, then your home is simply listed as another asset and would be taken into account in any divorce settlement. Then there is the issue of a rift in the family and the ramifications of family members owning your home.”
Alison advises that it is vital for anyone considering transfer of the ownership of their home to make sure they are getting the right legal advice.
“Whilst the pitfalls are many if you want to give your children your home while you’re alive, there are ways to plan to ensure the transfer is smooth and cost-effective after your death,’ she said.
“You can make a will which is structured to help protect against nursing home fees, ring fencing within a trust the value of the interest in the property and other assets of the first to die.
“The purpose of this is to ensure that these assets do not pass outright to your surviving spouse - your spouse would still own their half of the house and this will be taken into account in any care home fees assessment, but your half would be protected for your children.
“Whatever you decide, it is essential to ensure that you go in with your eyes open, take specialist advice and aware of all the potential risks and benefits.”