Gifting a property might seem like the ideal way to reduce the value of your estate and minimise inheritance tax liability, but it is far from straightforward and there are many pitfalls to be aware of.
The dangers of signing over property has been highlighted in a High Court case in which a father, Neville Paull, who had transferred his home to his son, was later asked by his son to leave the property. This led to father and son battling over the rights to the house, which was worth £650,000.
The case is a particularly distressing one as it left a father aged 76, who had worked hard during his life to purchase his dream property, in conflict with his son and at risk of losing his home. Mr Paull thought he had done the sensible thing by transferring the property to his son, to ensure that his children benefited from the house and to protect against inheritance tax and the possibility of care home fees eating into the value of the property.
This is an extreme case, which is yet to conclude, but it does provide a sobering reminder of the implications of gifting property. Here are some important considerations:
1. If the gift is made to save inheritance tax and the original owner still lives in the property it is still their asset for inheritance tax purposes, so the exercise will not work. There are a few exceptions to this, but they are unique to specific circumstances.
2. When a property is gifted, you no longer own your home. If you want to sell or adapt the property in any way, you’ll need the agreement of the person who you’ve signed your property over to. In the worst-case scenario, if you have not agreed rights of continuing occupation, the new owner could ask you to vacate the property.
2. Who is responsible for the ongoing maintenance of the property, insuring the property and paying the bills? This would all need to be established at the outset.
3. What if the new owner becomes financially unstable or goes into bankruptcy? The house, which is now one of their assets, is at risk of possession into bankruptcy proceedings.
4. What if the new owner divorces? The house will become a matrimonial asset, which could be brought into divorce proceedings, putting you at risk of eviction.
5. The house could be a second property of the new owner, which would mean future growth in the value of the second property would no longer be covered by principal private residence relief for capital gains tax purposes.
In conclusion I would advise you to carefully think through arrangements of this kind and consider what the drivers are behind such a gift. If there is a good reason to give up control of your main asset (and there are times when it is), do it in such a way that protects occupation and maybe utilise a trust structure depending upon the value of your home.
If this applies to you or you require help and advice on planning your future, contact me at firstname.lastname@example.org or phone 01782 205000