If you’re considering gifting your property to your children to avoid care home fees, professional advice is essential.

The practical and financial consequences of giving away your home to your children during your lifetime can be far-reaching.

Passing on your wealth to your family

Most people with children want to pass on their wealth. Many parents approaching or already in retirement have worked and saved, paid National Insurance and income tax, expecting their care to be paid for by the state.

Residential care costs vary depending on where you live, but can be in excess of £800 per week, and care in a nursing home is even more expensive.

This means your savings and investments could be used up over a few years, leaving very little for your family to inherit.

If you have over £23,250, you will be required to cover your care costs in full from your income and savings. Those who pay for their nursing and residential care are called self-funding. If you have assets between £14,250 and £23,250, the local authority will require you to contribute towards your care costs. Once your assets fall below £14,250, the local authority will fully fund your care.

You may qualify for NHS continuing health care (CHC) if you have medical needs. If so, the NHS will pay for your care.

Avoiding care home fees

Avoiding care costs is a common reason to consider gifting the family home to children, but doing so can have unintended consequences. 

It’s a widely believed myth that gifting property or assets to someone else, so you fall below the threshold of £23,250 means you will be able to rely on the Local Authority to fund your care.

When care is needed, your Local Authority will carry out thorough checks on your financial history. A gift of property in your lifetime may be considered a “deliberate deprivation of assets”.  If the Local Authority takes this view, they will carry out their means testing assessment as if you still own the property and assets you’ve given away.

What is deliberate deprivation?

Deliberate deprivation is any action a person takes with the intention of decreasing their assets to reduce the amount they are charged for their care.

With the pressure on social care funding, Local Authorities have an obligation to look back at the gifts you've made in your lifetime. If your Local Authority suspects you've taken steps to avoid paying your own care costs, they will investigate.

Giving away your family home to your children could be considered to be deliberate deprivation. If you continue to live in your home without paying rent, the ‘gift’ isn't genuine. The Local Authority could argue it’s a sham.

It's not only gifts of property that may raise questions about deliberate deprivation. Gifts of any kind that reduce the value of your assets can be investigated. 

As you might expect, it's illegal to deprive the Local Authority of funds deliberately. Where assets were given away with the intention of avoiding paying for care, the local authority can take action to recover them. This could happen even if the assets were transferred years before someone goes into care, as there is no time limit for deliberate deprivation of assets.

The risk of a gift being viewed as deliberate deprivation should be considered before taking any action. You’ll also need to consider the impact owning a second property will have on your children. 

Inheritance Tax and Capital Gains Tax

Continuing to use an asset you’ve given away is called “a gift with reservation of benefit”.

If you continue living in your home but give away the legal ownership to your children, you retain an interest in it, and so it would still form a part of your estate for Inheritance Tax purposes. You can avoid this by moving out or paying rent to your children. You would need to pay the full market rate - a small contribution or ‘peppercorn’ rent is unlikely to be sufficient to avoid the gift with reservation of benefit rules. 

Suppose you make a gift of your property that is not a gift with reservation of benefit and you die within seven years of doing so. In that case, the value of the gift is counted towards the value of your estate for Inheritance Tax purposes. Your executors pay inheritance Tax at 40% on the value of your estate above the inheritance tax thresholds.

Good advice is essential, especially if you:

• own property and assets worth more than £325,000

• gift more than £3000 each year

• have moved to a smaller property

• have been widowed

Capital Gains Tax may also be payable in the future if the property is not your child’s “principal private residence.”

If you transfer property ownership to your adult child or children, this means they now have a second home. Second properties are liable to Capital Gains Tax where the value of the property increases between the date it’s transferred to them and when it's sold.

Unintended consequences

Giving away ownership of your home also means giving up the legal rights of owning the property.

• If your child gets divorced, the property would be included in their financial settlement and may have to be sold.

• If your child were to become bankrupt, their creditors would have a claim on their assets, including your home.

• A family falling out could mean you are asked to leave or are evicted.

What are the alternatives to gifting property to children?

Depending on your reasons for gifting the property, other options are available to you.

You may decide to sell your property and gift the sale proceeds to your children. This gift would still be subject to Inheritance Tax if you were to die within seven years. You’ll need to find somewhere else to live and have enough income to pay rent and your bills.

Safeguarding assets from care home fees

It is possible to protect your assets from being used to pay for your spouse or partner’s care home fees.

You can use your Will to plan for the future.

If you leave everything you own to your spouse or partner, those assets belong to them and will be part of their estate. This means they will be included in your partner’s means-testing assessment. If care costs are on your mind, simple mirror Wills are not the answer.

Life interest Will trusts

By leaving your partner a life interest in your assets, you can ensure they are provided for during their lifetime. The Local Authority cannot include your asset held in a trust in your partner’s financial assessment - but your partner will have the benefit of those assets for as long as they need.

By setting up a life interest trust in your Will, once your partner leaves your shared home and it is sold, the portion of the property that was yours will pass under the terms of your Will.

Creating a trust in your Will is not deliberate deprivation because the gift does occur until you die. You cannot deprive yourself of an asset if you are no longer living. You do not have to use your assets to pay for your partner’s care, but a Will trust can be flexible if you want to allow your trustees to do so. They might consider this if any state-funded options are unsuitable.

If you and your partner both need care, the property will be included in any Local Authority means testing assessment. Being a tenant in common does not provide any protection - it is simply a different way to own property jointly and means you can gift your share in your Will.

Key takeaways

• There can be unintended financial consequences if you gift your home to your children and continue to live there.

• A Will trust can protect your share of the family home from being used to pay for your spouse or partner’s care home fees (if you were to die first).

• Your options depend on your personal situation and family arrangements.

• Seek advice if you are considering gifting property to your children.