We are often contacted by clients desperate to protect their home for their children. Does this sound familiar to you? Are you worried about your property being used to pay for care or to foot an inheritance tax bill on your death?
You may know that, since 6 April 2017, there has been an additional nil-rate band available when a residence is passed on death to one or more direct descendants (i.e. your children) and the maximum that can be claimed under this is £175,000.
Added to the current individual nil-rate band (£325,000) this means that, for an individual, there is up to £500,000 available before any inheritance tax becomes chargeable when you pass your home to your children. If you are married, it is also possible to transfer this £500,000 to a surviving spouse’s estate meaning that for many couples, provided their combined estate does not exceed £1 million, there will be no inheritance tax to pay.
Bearing this in mind, inheritance tax may no longer be of concern. However, what if it still is or you are worried about protecting your house from care-home fees? The short answer is that there is no magic wand. Many people may have heard and read about options such as giving away the home to family in their lifetime or putting the house into trust. It is possible to do this but there are potential pitfalls:
1. To avoid any gift being a “Gift with Reservation of Benefit” (where you purport to give something away but continue to benefit from it) you will have to pay full market rent to stay in your home.
2. Trusts can be expensive to set up and you may have to pay an immediate inheritance tax charge as well as 10 yearly charges after the trust is established.
3. There are potential Capital Gains Tax (“CGT”) consequences – you will lose the uplift for CGT.
4. You may be accused of deliberately depriving yourself of assets by the Local Authority if you ever require care.
5. Once given away, the house is no longer yours. If your child divorces, goes bankrupt or dies you may find yourself without a home at all.
However, do not despair! There are some other, less drastic, options:
1. If you are a couple, you may be able to protect half of the house by leaving it on trust for the survivor of you through your Wills.
2. Consider downsizing and gifting surplus money to your family now.
3. If you live with one or more children, you may want to give them a share of the house.
4. Discuss entering an equity release scheme and borrowing against the value of the house. Just make sure that the interest on sums repayable is not more than the inheritance tax you might be saving!
5. Finally, by conserving some of the value in your home you will be able to choose for yourself how and where you receive care.
If you would like to speak to one of our legal experts in regards to any of the above, please get in touch by calling 01725 663295.