Gifting House to Children?

Duncombe

Are there any financial benefits of parents gifting their house to their child whilst both 'mum' and 'dad are still alive, rather than leaving it to their children in a will?

Specifically if the house is owned (no mortgage) and the parents would continue to live in the house until their death.

BitterAndTwisted

Depends on the total assets of Mum & Dad and the age of the child. There could be Capital Gains Tax and Inheritance Tax implications. And implications other than tax, of course.

Duncombe

Lets say the child is 30. Parents are 70. Parents total assets are about £1mil. (£600k house, £250k house and savings and what not in various bank accounts - these will be used to live off during retirement).

Im not very au fait with Cap Gains and Inheritance tax - can you explain?

Yorkie1

I think that the house will be deemed to remain part of the parents' estate for IHT purposes if they continue to live there without paying market rent - it's a gift with reservation of benefit.

And I think that if the children do not live in the house, when they come to sell it they will be liable for Capital Gains Tax (subject to annual allowances) on the rise in value between date of acquiring it and date of sale - which of course could be quite a rise if parents transferred it tomorrow yet the house didn't fall to be sold for say 10 years.

They are only my thoughts, though. Someone else may well know more or better.

NEH

If you do a forum search lots of threads will come up about this as I know we looked into it for our mum who was when she went for some free advice was considered too young at 66/67...

There is a lot of complications and it affects the children as well in terms of the tax implications. The rules have changed in the last couple of years to close the loophole...Sorry can't remember all the details at this current time except for the fact that mum would have had to pay us rent, the only other thing is that it is a very tricky process...

Duncombe

Thanks for your reply Yorkie.

A couple of things. The parents bought the house outright - they have never had a mortgage on the property so not sure if your info about 'market rent' is applicable? Why would someone be expected to pay rent on a house they (or anyone else) owns?

Also - one of the houses would not be lived in (it is a holiday home) but would also not be sold as it has been passed down from previous generations. The other, higher value house is planning to used as the home of the child after the parents are deceased. Obviously, plans change and nothing is certain, but that has been the long term plan.

I am unsure if the deeds could just be transfered to the child without an officially gifting? I really dont understand any of the processes, any advice would be appreciated.

Jowo_2

Also google 'deprivation of capital' and 'notional capital' to understand why the elderly parent could encounter difficulties accessing means tested services, such as care homes, if social services deem that they've given away their capital.

Duncombe

Yes, I understand about deprivation of capital. There is no way the parents would ever be reliant on state benefits - they simply have too much in savings which would be spent! They've worked hard to provide for themselves during their retirement.

Am i right in thinking that the houses would be exempt from Inheritence Tax if they were gifted and the parents survived for more than 7 years afterwards?

Ive had a quick look about Cap Gains tax and it all seems to be dependent on property being sold. As neither property is actually going to be sold - just ownership transfered - would Cap Gains tax be applicable?

Yorkie1

Duncombe wrote: »

A couple of things. The parents bought the house outright - they have never had a mortgage on the property so not sure if your info about 'market rent' is applicable? Why would someone be expected to pay rent on a house they (or anyone else) owns?

Also - one of the houses would not be lived in (it is a holiday home) but would also not be sold as it has been passed down from previous generations. The other, higher value house is planning to used as the home of the child after the parents are deceased. Obviously, plans change and nothing is certain, but that has been the long term plan.

Re the market rent, have a look at this link from hmrc's website
http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM04071.htm

Essentially, if a person gives away something but continues to treat it as their own then the taxman continues to treat it as theirs. Market rent on a property is an indication that they are no longer treating the house as theirs.

Jowo's point about deprivation of capital is also a good one. If your parents give away some of their assets, and then later need to be assessed for care needs, those assets may well be deemed still to be owned by them for the purposes of means testing. On the figures you've provided that's unlikely to be an issue but, as you say, the future can never be wholly foreseen.

Duncombe

Yorkie1 wrote: »

Re the market rent, have a look at this link from hmrc's website
http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM04071.htm

Thanks for that link. I am a little more clued up now.

Would it make any difference if, for example, the house deeds were transfered to the childs name and the child moved into the house but remained there after the death of their parents? No 'rent' would be paid to the child from the parents, and all bills would be shared equally between the three occupants.

Or would that still count as the parents treating the property as their own?

You are right about the need for state care being small - almost non-existent in this case. The reason the parents have so much to give away is because of their savvyness when it comes to money. I doubt that will change in the latter years of their life.

On a side note - I can fully understand why those with high value assets try to avoid paying the ridiculous sums of tax that seem to be chargable after death. Whatever happened with being rewarded for hard work and success

Yorkie1

Duncombe wrote: »

Would it make any difference if, for example, the house deeds were transfered to the childs name and the child moved into the house but remained there after the death of their parents? No 'rent' would be paid to the child from the parents, and all bills would be shared equally between the three occupants.

Or would that still count as the parents treating the property as their own?

Getting a bit beyond my knowledge limits now, I'm afraid.

Duncombe wrote: »

On a side note - I can fully understand why those with high value assets try to avoid paying the ridiculous sums of tax that seem to be chargable after death. Whatever happened with being rewarded for hard work and success

For the sake of playing devil's advocate, why should the hard-pressed state subsidise something which one has every means to pay? An argument which goes round in circles regularly on this forum!