Should I gift my home to my children?

Michelle Gavin, partner in the Private Client team at Lodders, explains the implications of gifting property to children and outlines an alternative approach you may choose to take.

A question we often hear is whether it is wise to “put the house in the children’s names.” What people usually mean by this is making a gift of the family home to their adult children. For many parents, the motivations for this are making tax savings or avoiding future liability for care home fees. But before signing away ownership of your most valuable asset, it’s important to understand the implications.

Once you transfer ownership, you lose the right to decide what happens to the property. It could be sold, mortgaged, or even claimed by creditors, and you would have no say. You will also lose the right to live in the home or rent it out.

There are a lot of myths surrounding the gifting of property to children, so it’s important to understand the implications before making this significant decision.

 Myth 1 – Gifting my home to my children will save care home fees

If you give away your home to qualify for means-tested benefits or avoid care home fees, you could fall foul of the deprivation of assets rules. These rules mean that local authorities may still treat you as still owning the property, even if you can’t reclaim it, when assessing your ability to pay for care. Similarly, the Department for Work and Pensions may assess you as if you still own the asset when calculating your benefits. 

In short, gifting your home could leave you in financial difficulty later down the line, especially if you need high-quality care. For those with modest means, state-funded care may be the only option, but if you have assets, planning to avoid care costs might not be the best strategy.

Myth 2 – Gifting the home will reduce my inheritance tax bill

Inheritance tax (IHT) applies to estates worth over £325,000 (the Nil Rate Band). Anything above this threshold is taxed at 40%. There is also the Main Residence Nil Rate Band of £175,000, which can reduce tax liability if you leave your home to direct descendants in your will.

It may seem like there are IHT advantages in gifting a house, because gifts generally become exempt from IHT after seven years.

However, gifting your home during your lifetime can complicate matters. If you continue living in the property after gifting it, HMRC will treat it as a gift with reservation of benefit (GROB), meaning it’s still taxable in your estate on death, even if you live beyond seven years.

One potential workaround is to gift the property and then pay rent to your children; however, you must pay the going rate for similar local rental properties in order to take it out of the IHT net. Plus, your children will then be liable for income tax on the rent that you may them. The rules are complex and highlight the importance of seeking professional advice on such matters, Find out more about how gifting property can impact IHT liabilities here.

Myth 3 – Gifting my home to my children won’t affect Capital Gains Tax

When you own and live in your home, any increase in value is exempt from Capital Gains Tax (CGT) thanks to Principal Private Residence Relief (PPR). But once your children own it and don’t live there, future gains are taxable. You also lose the CGT uplift on death and therefore miss out on significant tax savings.

It’s also worth noting that if you are giving away a second home or holiday home, then you may be liable to pay CGT on any increase in value that has occurred between first owning it and giving it away.

Family politics

Once your home belongs to your children, it becomes part of their financial world. Divorce, bankruptcy, or even death could put your home at risk. Disagreements or changes in circumstances could also lead to eviction or forced sale. You should think about what may happen should one of your children pass away before you without updating their will to make provision for you to occupy the property. Whilst these situations are rare, they do occur.

Responsibility for the property

Even after gifting your home, you might agree to cover buildings insurance, repairs, and maintenance. This can work initially, but what if your financial situation changes? To avoid future problems, you should agree who is to pay for all the property’s outgoings and formally document this.

As the new owners, your children could charge you rent, take out a mortgage on the property, or even sell it. You could continue to occupy the property and pay a market rent to your children, to avoid falling foul of the GROB rules for inheritance tax purposes. However, this would require you to survive for seven years from the date of the gift. It is important to note that where market rent is paid, the owner is liable to income tax on this income, which may be high depending on their income tax band.

Estate planning through your will

Instead of gifting your home during your lifetime, consider planning through your will. For couples who jointly own a property, structuring wills to include trusts can help protect part of the property from care home fee assessments while ensuring your children still inherit. This strategy allows you to safeguard the value of the first spouse’s share by placing it in a trust, so it does not pass outright to the surviving spouse. While your spouse would still own their half of the house – and this will be considered in a care home fees assessment – your half will be protected for your children.

Legal advice on gifting a property to children

If you’re thinking about gifting your home, it’s important not to act without professional legal advice, as the financial and emotional consequences can be significant. Lodders’ award-winning Private Client team can work with you to explore the best options for your family. Get in touch today.