Giving your house to your children while you are still living in it is the worst thing you could do.
You sometimes hear of people who have given their house to children while they are still alive, or who say they’ve done it.
Those people often think it’s a clever way of avoiding inheritance tax or care fees or both. In fact, neither is true.
Inheritance tax and market rent
If you give your property to your children and still continue to live in it, you cannot avoid inheritance tax. Inheritance tax is calculated on the value of your estate. This includes assets you have given away but are still using or “enjoying the benefit of”. In tax language, it’s called a Gift With Reservation (GWR). If you are still living in it, you are still enjoying the benefit of your house.
One way of getting around this is to pay a market rent, which is regularly reviewed to the new owners. It can’t be a nominal rent, it must be what other people would pay to rent a similar house. In other words, it would be very expensive!
Care fees and deliberate deprivation
If you ever need to go into care, your local council will carry out a means assessment to find out how much you’ve got. If that’s more than £23,250 under the current rules, you have to fund the full cost of care yourself. Councils will provide some funding below this threshold and then will fully fund your care when you’re down to your last £14,250.
If there is no one left living in the house, the council can sell it to recoup your care fees. So why not just give it away to your children before then?
Well, it’s because of “deliberate deprivation” rules. If councils decide that you have given your house away deliberately to avoid care fees, they will simply disregard it, treating the gift as if it was never made.
How could they prove it was deliberate? For starters, you cannot argue that you did it to avoid inheritance tax. And second, gifting it away is extremely dangerous if your children predecease you.
Forced out by a new owner
We tend to think that we will outlive our children. But that doesn’t always happen. So what happens if you’ve given your house to someone who dies before you?
It depends on whether or not they made a Will. If they didn’t make a Will and they are married, their spouse would inherit all, or most of their estate (some could also go to children).
Imagine now that you don’t really get on with your son-in-law or daughter-in-law. They make your life uncomfortable and ask you to move out. Or, they could be going through financial difficulties and want to sell the house to raise funds.
Or what if they do have a Will? They could have decided to give their assets to an unmarried partner or someone or something else, like a charity. It would be very easy for you to be forced out of your home.
For all these reasons, it’s a very bad idea to give away your house to your children and continue living in it. A much better idea is to set up a Lifetime Asset Protection Trust.
Putting your house in an Asset Protection Trust does not save you inheritance tax. The gift into the Trust would still be counted as a GROB and so would still be counted towards your inheritance tax liability.
In addition, there’s no guarantee that you could avoid care fees this way. If there’s a foreseeable need for care, in other words it’s clear why you set up the Trust, the council can choose to challenge the Trust. If they win the challenge, they would count the value of the property towards the cost of your care.
Even though it may not be effective for the reasons you’d hoped, setting up a Trust can have lots of other benefits. To find out more, check out our other articles or click the button below to request a callback.