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The perils (and benefits) of signing over your house to the kids

Paloma Kubiak
Written By:
Paloma Kubiak

Signing over your house to children or grandchildren isn’t a decision to be taken lightly. Whether protecting assets, for tax planning or for later life care reasons, it’s rarely as simple as it sounds.

Generally, the decision to sign over your house is taken to safeguard the assets of the family, the individuals involved keen to ensure that the fruits of their labour pass to the people they care for most.

They want to protect against inheritance tax or perhaps avoid their assets being eroded by care costs later down the line. Sometimes, they want to try and give their children or grandchildren a leg up on the property ladder. This approach to tax planning can make me wince because it is rarely as simple as people think it is, but there are situations where this strategy can work for people.

Signing over your property: what to consider

There are two really important factors to understand if you’re considering doing this. Firstly, it’s vital to know what will work effectively from a planning perspective; and secondly, there must be clarity around the benefits and risks in the short, medium and longer-term.

Below, we focus on people gifting their main residence, though there is course the option to gift other property – holiday homes, buy to lets, second properties. Often these properties have been held for years and have significant capital gains which may make gifting them an unattractive prospect.

Signing over your main property would broadly fall into two scenarios:

  1. You gift your property and continue to live there but the recipient/s live elsewhere
  2. You gift the property and your children/grandchildren live there with you i.e. multi-generational living.

A key benefit of any kind of gifting is the help it provides. Assuming it’s an appropriate thing to do, generally there will be some sort of immediate or long-term benefit to the recipient.

Gifting property to your children or grandchildren while you continue to live there doesn’t provide immediate monies in the capital sense, but it might allow your children to raise funds by leveraging some of the equity. It is worth keeping in mind that you would be required to pay market rent while living there for the transfer to be effective for inheritance tax purposes.

Where you have different generations living in the same household, it is possible to gift a proportion of the property to the younger generation and for that gift to be effective for inheritance tax mitigation. You will however have to survive for seven years for the gift to work. There are other benefits to this as your family will be on hand if you require extra help and support.

When it works well for both parties

John and Moira invited their adult daughter, Sarah, and her husband to live with them in North London several years ago. Sarah was changing careers and wanted to reduce her costs at the time.  The years passed by and grandchildren arrived. Living together allowed Sarah to benefit from help with childcare. As her career progressed, there was some pooling of resources and money spent on the house to meet everyone’s needs.

Nine years ago, John and Moira gifted 50% of the property to Sarah and her husband, reducing their taxable estate in the region of £1.3m, saving around £520,000 in inheritance tax. Another fortunate consequence of this planning is the restoration of the Residents Nil Rate Band, resulting in a further saving of £100,000. John and Moira are now in their 80’s and comforted to know help is on hand if they need it further down the line.

If you do choose to embark on this path, keep in mind that what may seem straightforward can quickly become very complicated. For example, if you’re still living in the house you sign over you will need to start paying rent. How will this be funded? Who is responsible for maintenance of the property?

With the introduction of the Residents Nil Rate Band, many people will be taken out of inheritance tax altogether. This allowance will increase the amount that a legal couple are able to leave to their children to £1m. It also pays to check that you have an IHT bill to face – if not, there’s no need to sign over your home.

It’s also worth noting that if you have other substantial assets then gifting the house may not preclude you from having to pay for your own care. You may also want some choice on the suppliers of that care, which if you have gifted assets away, may not be possible.

Avoiding the pitfalls

What concerns me most about gifting your main residence is the potential risk it carries. While the current situation could be harmonious this may not always be the case. Even when relations are good, being able to stay in what was your property may be put in jeopardy by children getting into financial difficulty, getting divorced or, sadly, not acting with integrity.

I have seen cases where children have evicted their parents, moral arguments being no protection against legal ownership.  Another tragic situation I have seen is where people outlive their children and the home passes to their beneficiaries.

When things go wrong

Jack and Mary ran a family business. Their eldest son, Mark worked in the business and back in the 90s they decided to gift a proportion of their house and business to him. The house was notionally divided and Mark moved in with his young family.

Fast forward to 2005 and Mark and his wife separated and subsequently divorced. As part of the settlement (unknown to Jack and Mary) their ex daughter-in-law, Valerie, was awarded beneficial ownership of Mark’s proportion of the house. Jack and Mary found themselves living next door to Valerie and their grandchildren.

At the time the grandchildren were young and Mary especially was very close to them, so life settled down again. Fast forward another ten years and the situation had become untenable. Valerie had a new partner whom Jack and Mary did not like. It proved costly and time consuming to come to an arrangement with Valerie to move out.

Always seek advice first

You should always question whether signing a property to another person(s) is effective for you in the long-term. For example, local authorities will look very closely at actions that have been taken in the past when considering the payment of care costs.

In a world of tight budgets, they will look to unwind any ‘deliberate deprivation of assets’ and claw back the money you have divested. Therefore, whatever your motivation, before making this kind of decision you should always consult with legal and tax specialists to explore your personal requirements and situation.

Anne McClean is chartered financial planner at Charles Stanley