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HOW TO. . . PREPARE WILLS AND PROBATE
INHERITANCE TAX PLANNING AND THE FAMILY HOME
by Clare Fleming Partner, Harrison Drury
We often get asked by clients if it is possible to ‘gift’ their home to their children with a view to mitigating Inheritance Tax.
Inheritance tax is currently charged at 40 per cent on the net value of your estate exceeding the Inheritance Tax Nil Rate Band. The Inheritance Tax Nil Rate Band applicable to your estate is dependent on your personal circumstances and ranges from £325,000 to £1m.
It is very rare that we would recommend gifting your home to your children as there are some very serious pitfalls to consider. For example, if you gift your property to your children and you continue to live there, you will need to pay your children a market rent.
If you do not pay a market rent, HM Revenue and Customs will argue you have not made a valid gift to your children because you have retained the whole benefit of the property. This is called a ‘gift with a reservation of benefit’ and means your property would still form part of your estate for inheritance tax purposes regardless of when that gift was made.
Your children may also have to pay higher rate Stamp Duty Land Tax if they buy another property as they will be considered to own a second home.
In addition, your children may also have to pay Capital Gains Tax on any increase in value on your home. This would apply if the property is sold in the future and your children are not living in that property as their first home.
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If your child or children were to divorce or get into financial difficulty, your home could form part of any ancillary relief or bankruptcy court proceedings and your property may need to be sold. Not only does this bring the risk of leaving you homeless but it also means some of the net proceeds from the property could be payable to third parties.
It is very rare that we
would recommend gifting your home to your children
In the unlikely event of one of your children dying before you, their share of your home would form part of their estate. This means you could find yourself owning a property with your son or daughter-in-law or even your grandchildren.
If you require residential or nursing care, the local authority may argue that you have gifted your home to avoid paying care home fees. This is called a ‘deliberate deprivation of assets’. As a consequence, the local authority may refuse to fund your care.
These above points should be carefully considered before you make any plans to ‘gift’ your home. We strongly advise that you seek professional advice from a solicitor before transferring the ownership of your home to your children.
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