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Why gifting the family home isn't a 'get out of tax' solution

Giving away the family home isn’t a magic solution to avoid tax and care home fees, but there are other things you can do!

If it was possible to transfer the family home to children to avoid paying inheritance tax and care home fees, I'd be doing it left, right and centre and no one would own their own home anymore!  It’s a nice thought isn’t it?  Sadly, it doesn't work that way.  HMRC and your local authority wouldn’t let you get away with that would they!?

There are two very big problems in thinking that transferring the home will result in paying less tax and care home fees.

  1. If you give away the family home and you continue to live in it without paying market rent to your children, HMRC will still take the value of your share of the home into account in calculating inheritance tax.
  2. It is likely that if you require residential care in the future, your local authority will deem you to have intentionally deprived yourself of an asset (your home) to avoid paying care home fees.  You've guessed it, if that is the case, then the local authority will treat you as if you still owned the property when assessing whether you should pay care home fees!

So, I hear you ask, what can you do then?

For couples, there are certain types of Will you can put in place which offer some protection from care home fees.  These are called life interest trust Wills and work by placing the first to die's residuary estate (including their half share of the home) into trust on death.  The survivor has the right to the income from the trust, and with it, the right to live in the home without the survivor paying rent although they would still need to pay for the usual household expenses.  If the survivor requires care, the local authority will only be able to take into account the survivor’s half of the family home as the other half is held in trust (usually ultimately for the benefit of the children).

In terms of inheritance tax, for married couples life interest trust wills are tax efficient because, if the entire estate passes into trust for the benefit of the surviving spouse, spouse exemption applies on the first death meaning no inheritance tax is usually payable.  On the second death, the estate has the benefit of the transferable nil rate band and recently introduced residence nil rate band (provided the conditions are met) meaning that the two combined estates potentially have the benefit of up to £1 million inheritance tax allowance by 2021.

For single people and unmarried couples, the situation is more complex but that there are steps to take to ensure that inheritance tax is mitigated as far as possible.

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