As a parent, it's only natural that you wish to help your children out in any way you can. And what better way to pass on your home to your children after you've passed away. And by law, there is nothing to prevent you from doing this, even if you are still currently living in the property.

However, you should be aware of a number of potential pitfalls if you're considering signing over your property to your children:

1. Capital Gains Tax (CGT)

"Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that has increased in value. It’s the gain you make that’s taxed, NOT the amount of money 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).

If your children do not reside in your property at the time of transferring your property into their name and the property increases in value, then the property will be subject to CGT if and when they sell the property.

In similar fashion, if you own a second property or vacation home, then you may also be liable for CGT on any potential increase in value between when you first owned the property and the point at which you gave the property away.

2. Inheritance Tax (IHT)

Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died. There’s normally no Inheritance Tax to pay if either:

- the value of your estate is below the £325,000 threshold

- you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club

You may still need to report the estate’s value even if it’s below the threshold.

If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren your threshold can increase to £500,000.

If you’re married or in a civil partnership and your estate is worth less than your threshold, 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).

Gov.co.uk

"The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold."

Example:

Your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).

You might be tempted to think that gifting your house carries IHT advantages, since gifts are generally IHT exempt after 7 years. However, you should bear in mind that if you sign over your house to your children but you continue to live in the property, then this would then be considers a “gift with reservation of benefit.”

In other words, you are considered 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 the 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 then consider that your children will also be liable for any income tax on the rent you pay them.

3. Fees for Residential Care

Many people transfer their property to their children in order to avoid having to pay care fees.

However, be aware that your local council may view this as a "deliberate deprivation of assets".

Here's how Age UK refer to the 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."

If your local authority considered a case of 'deprivation of assets", they can enforce the transfer of ownership, so that the property can be switched back to the parents.

So beware: simply transferring your property to your children in this scenario is not likely to protect your home.

4. You Won't Have Any Legal Rights Over the Property

This might be rather stating the 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 and you'll have no control over a number of unforeseen circumstances, such as the following:

- What might happen if your children then 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.

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If you're considering your Estate and what you would like to do with it before or once you've passed, then contact us for some advise.