Gifting the Family Home to Your Children – A Strategy for Disaster.
solved’– this is the classic advice given to many people by a mate in the pub. Sadly it is one of the most dangerous pieces of advice that anyone can give, or act on.
There are five major drawbacks to giving away your home to family members:
Loss of Control: If you gift your home to a family member you might have faith that your children will do the right thing for you in later life, but you have no way of being certain. If you need to sell or downsize, you will need their permission and they will act for you. If you need extra income in retirement then giving your family home to your children will stop you from taking equity release. In extreme circumstances, your children could rent out the spare rooms and receive an income, and you couldn’t stop them.
Gift with Reservation of Benefit (GROB): If you give away the family home, but you continue to live in it you fall foul of the GROB rules which means that HMRC will set the transaction aside for Inheritance Tax Purposes, and the Local Authority can set aside the transaction as deliberate deprivation for the purposes of care costs. The only way to get around this rule is for you to pay a full market rent to the new owners (your children), who will then need to declare the income and pay income tax on it. You should note that doing this only resolves this issue, you are still subject to the other 4 drawbacks.
Divorce: If one of your children gets divorced, your home is a part of their assets and will form a part of their divorce settlement, in the worst case this could mean that your children have to sell your home or raise a mortgage against it to pay off their ex-spouse.
Bankruptcy: If your child is declared bankrupt, your home is a part of their assets and will be seized and sold by the Trustee in Bankruptcy to settle your child’s debts. This will leave you homeless, forced to move out of the family home, potentially into rented accommodation.
Tax: If you give your home to your children, it crystallises the value of the property for the purposes of Capital Gains Tax. This means that if the children go on to sell the property for a higher value they will pay capital gains tax on the difference. But it is worse than that, because you have fallen foul of the GROB rules (above) the full value of the property is still in your estate for Inheritance Tax purposes which gives the potential for the home to be taxed twice.
In simple terms – don’t do it. There are ways in which the family home can be passed to future generations, but you must always take professional advice. Call 01778 382723 or click www.will-probate.co.uk for help.