Should I transfer my house to my children to avoid Inheritance Tax?

Oct 3, 2021 | Estate Planning

After your death, it is likely you will want to pass on your home to your children, however, with the rise in property prices and an inheritance tax rate of 40% on everything over the nil rate bands to consider, many people are asking themselves if they should transfer their home to their children so that the transfer is potentially classed as an exempt transfer from an inheritance tax point of view.

 

Theoretically, it seems a good plan to gift your home to your children while you are alive. This is a great way to avoid inheritance tax, which can be substantial. When you pass on, your children already own the house, and hence there is no tax to be paid, right? Unfortunately, it is not that straightforward. There are a number of issues you should consider before transferring such a substantial asset. Here are just a few points to consider:

1. To be completely exempt from inheritance tax, gifts must be transferred out of your estate at least 7 years before you die. If you die within 7 years, taper relief is available so the amount of tax may be reduced but not avoided completely. Unfortunately, none of us know exactly when we are going to die so timing the transfer to perfectly coincide with your death is almost impossible.

2. If you gift your home to your children but continue to stay in it, it could be classed as a gift with a reservation of benefit unless you are paying rent to the new owner. The rent needs to be as per the market rate. This may be an option for people who have another property to live in, but even if you move out and live elsewhere, you will not be able to receive any rental income from the property you have transferred as this rent will need to go directly to the new owners to avoid being classed as a gift with a reservation of benefit.

3. You may need to sell your home or offset care fees against it to fund care for yourself in later life – if you have already given the asset away you may not have enough other assets to cover the cost of care for yourself.

4. If you transfer your house to your children and they later end up going through a divorce or bankruptcy proceedings, the house that has been transferred into their names will form part of their assets and will be taken into consideration by the courts.

5. If you later change your mind and decide that you do not want your children to inherit your house there is nothing you can do about it. Unlike a Will that could be changed, the transfer is irreversible unless your children agree to it.

As you can see, transferring your house to your children during your lifetime may not be the right option and is not always as straightforward as people assume. If you would like further advice regarding estate planning and the options available to you, get in touch to book a free consultation.

 

 

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