What Are the Implications of Transferring My Property to My Children?

Squiggle Support Team

Last Update 2 months ago


INTRODUCTION

As a parent, it's only natural that you wish to help your children in any way you can. And what better way to pass on your home to your children after you've passed away?


By law, nothing can prevent you from passing on your property to your children, even if you still live there. However, making such a decision carries several potential pitfalls which may carry unintended consequences.


This article outlines several important factors you should consider before making such a decision.



1. CAPITAL GAINS TAX (CGT)

CGT is a tax on the profit when you sell or 'dispose of' an asset that has increased in value.


It's the gain you make that's taxed, NOT the amount you receive" (source definition: gov.co.uk).


Example:

• You buy a work of art for £5,000 and sell it later for £25,000. Your gain is £20,000 (£25,000 minus £5,000).


Consideration for Property Transfer:

If you're considering transferring a property to your children and it is not your children's primary residence, CGT may be applicable when they decide to sell it.


The same rule applies if you own a second property or vacation home, and CGT may be applicable on any potential increase in value between when you acquired the property and when the property is away.




2. INHERITANCE TAX (IHT) IMPLICATIONS


What is IHT?
IHT is a tax on the Estate (property, money, and possessions) of someone who's died. The standard IHT rate is 40% and charged only on the part of your Estate that's above a specific threshold (source gov. uk).


Thresholds and Exemptions:

  • The current threshold is £325,000.
  • No IHT is applicable if the Estate is below the threshold or if anything above it is left to a spouse, civil partner, a charity, or a community amateur sports club.


Further Considerations:

  • You may still need to report the Estate's value, even if it's below the threshold.
  • The threshold can increase to £500,000 if you give your home to your children or grandchildren (including adopted, foster, or stepchildren).
  • If you're married, or in a civil partnership, any unused threshold can be added to your partner's threshold when you die. This means their threshold can be as much as £1 million (source definition: gov.co.uk).


Example:

  • If your Estate is worth £500,000, your tax-free threshold is £325,000.
  • The IHT charged would be 40% of £175,000 (£500,000 minus £325,000).


What About Gifts?

You might be tempted to think that gifting your house carries IHT advantages since gifts are generally IHT-exempt after seven years.


However, if you continue to live in the gifted house, this would be considered a "gift with reservation of benefit." In other words, you are deemed to reserve the right to benefit (i.e., living in/living out) from the property.


Under current UK tax rules, even if you live beyond seven years, the property will continue to be part of your Estate on your death.


One workaround would be for you to pay rent to your children at the going market rate for similar local rental properties in your areas. However, you should consider that your children will also be liable for any income tax on your rent.




3. RESIDENTIAL CARE FEES

Many people transfer their property to their children to circumvent care fees. However, your local council may interpret this as "deliberate deprivation of assets."


Age UK's Definition of Deprivation of Assets:


"If someone intentionally reduces their assets - such as money, property or income - so these won’t be included in the financial assessment for care home fees, this is known as ‘deprivation of assets’. If your local council concludes you have deliberately reduced your assets to avoid paying care home fees, they may still calculate your fees as if you still owned the assets."


Legal Implications:

If a local authority determines a case of 'deprivation of assets,' they can reverse such transfers.


Be Aware:

Simply transferring your property to your children in this scenario does not guarantee protection against care home fees.



4. LEGAL RIGHTS OVER THE PROPERTY

This might sound obvious, but it's worth pointing out that once you transfer the property into your children's name, you'll no longer be the legal owner of the asset. You'll have no control over unforeseen circumstances, such as the following:


  • What happens if your children decide to sell the property?
  • What happens if you fall out with your children, and they force you out of the house?
  • What if they decide they want to live in the house themselves?
  • What happens in the case of bankruptcy?
  • What if your children go through a divorce or separation? In this case, an ex-spouse may have grounds to put forward a claim against their Estate that might include your property.


Again, remember that once the property is signed over to your children, your legal rights over it are greatly diminished.



NOTE ON CHECKING PROPERTY OWNERSHIP

To check the legal status of your property, we advise the following:




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