Why it’s NOT a good idea to transfer your house to your kids in your lifetime!

Transferring property to children is a topic often raised by clients that want to reduce the amount of inheritance tax (IHT) payable on their estate, to avoid paying care home fees or simply to make life easier for their loved ones after their death. We often advise our clients AGAINST doing this for the following 5 reasons:

Transfer property to your children

5 reasons it’s not a good idea to transfer your property

  • If your children own your house (or part of it), it will be treated as their asset if they get divorced, file for bankruptcy or are sued. All these circumstances could result in the house being sold to meet the settlement.
  • If you fall out with your children, they could evict you. They could sell the house or rent it out and you would have no say in this.
  • If your children own their own homes as well, they may become liable for various taxes including capital gains tax (CGT) on the increase in value of your house from the value at which you purchased it to its sale price if they choose to sell; or higher rates of stamp duty land tax (SDLT) if they buy a new property of their own.
  • If you continue to live in your house after the transfer this will be considered as a gift with reservation of benefit for IHT purposes. Essentially, it will still be treated as your own asset (even if you survive the gift by seven years), so will be included in your estate when calculating how much IHT is due on your death, resulting in no IHT saving. You can avoid this by paying your children market rent, but this in turn has its downsides as your children will need to declare the rental receipts on their tax return which will lead to an income tax liability for most.
  • If you gift your house to your children to avoid paying care home fees, the local authority may consider this a deliberate deprivation of assets and they can overturn the transfer. Your home would then be included when calculating your contribution to your care. 

The key benefit to your children inheriting your property

One major benefit to your children inheriting your property on your death is that they will benefit from a tax-free uplift in its value. They will receive the house at its value on the date that you die, rather than the value that you originally purchased it at. For those of you that have owned your property for years, this increase in value could be substantial, so the potential CGT (Capital Gains Tax) saving here could be huge.

If you would like specific advice on your individual circumstances, or if you would like to discuss other options for mitigating tax on your death, please get in contact with us for a free initial advice appointment on 01622 934887 or enquiries@islalaw.co.uk. We would love to help you!

Transfer house to children