Give House Away

Published / Last Updated on 13/05/2021

Giving a property to the Children Tax

Care fees funding is much in the news at the moment with cross party negotiation taking place on the best way to fund care in later life.

The current position in England and Wales is that if you are worth more than £23,250 (including your home), you will be required to pay for your own social care.  Nursing i.e.  NHS medical care is paid for by the NHS.  In short, you get your medicine but your board and lodgings you pay for yourself.  This means many people have been forced to sell their own home to pay for their care.  There is of course public outcry in that people have worked hard all their lives and then lose all their wealth if they need care.

I Will Give My Money Away - Deprivation
Many people take action to protect their money by spending it or giving it away.  This may work but it may also be deemed as a deliberate deprivation of assets if you give money away when you already have an illness that may lead to the need for care.  The only sure fire way to give money or assets away is to do this when you are younger and healthy by using bonds and trusts.  But what about your home?

Gifting Your Home to Children
There are a number of problems with giving your home away:

  • Gift with Reservation: You probably still want to live in your home.  This may then become a “gift with reservation” for inheritance Tax.  In short, on the day you die, HMRC may claim that you never really gave your house away so it will form part of your estate.
  • Income Tax on Rent: You may wish to consider paying a rent to your children so it is not a “gift with reservation”, as they are now your landlord.  This may mean they have an income tax liability on the rent as well as capital gains tax to pay when they eventually sell the home as it is now an investment property for them.
  • Divorcing Children: What if your children, who now own your home, divorce? Your home, now their asset, will be part of any financial negotiations on divorce.
  • Pre-Owned Asset Tax (POAT): If you gift your home instead to say to a family trust for the children but to also protect it from them divorcing or you paying no rent to avoid income tax, then HMRC has yet another way to tax you.  Pre-Owned Asset Tax: You are taxed as having a benefit in kind, just like a company car.  The taxable benefit is that you live in a property that you gave away, do not pay rent for but you still get a benefit from it i.e.  live in it rent free.

How is POAT calculated?
The deemed annual benefit is the value of the home on a prescribed date multiplied by a rate of interest set by HMRC.  However, if the benefit is under the deemed benefit annual limit, currently £5,000, it is not taxed.

Example One - House that you gifted into trust valued £150,000 on 6 April 2011:

  • £150,000 X 4% (HMRC valuation rate April 2011) = £6,000.
  • Result: Above Annual Limit: Whole deemed benefit of £6,000 is taxable under POAT.
  • £6,000 is treated added to your salary or pension income and taxed as income

Example Two - House that you gifted into trust valued £120,000 on 6 April 2011:

  • £120,000 X 4% (HMRC valuation rate April 2011) = £4,800.
  • Result: Below Annual Limit: POAT charge is not payable.

Professional Care and Estate Planning
Even in these few lines, we hope we have highlighted the pitfalls in something as simple as giving your home or a valuable painting or a vintage car to your children when estate planning.  Asset protection really does need the help of a professional financial adviser.

Contact us and get advice on giving the house to the children.

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