There are many reasons why someone would consider giving property away during their lifetime to a loved one rather than simply leaving it to them in their wills. The most obvious of these are to:

Avoid Inheritance Tax.

If the property is given away so as to avoid Inheritance Tax then the scheme is unlikely to work. The simple rule is that if a property is given away, and yet the person making the gift (“the donor”) remains in occupation, then they will still be deemed to be the owner at the time of death for Inheritance Tax purposes. The scheme will therefore only benefit those who give away the property but who do not retain any benefit from it – and even then, they will have to survive for a period of seven years from the date of the gift to obtain the full benefit.

Enable the family to benefit from the property when the current owners are concerned about bankruptcy

Giving the property away to safeguard it from the trustee in bankruptcy is also unlikely to work. There are rules specifically formulated to cover this. If a property is given away less than two years before bankruptcy the trustee has an automatic right to set aside the gift and reclaim the property. If the donor goes bankrupt within five years of the gift, then the trustee in bankruptcy can take it back if he/she can establish that at the time the gift was made the person making it was not solvent.

Ensure that a particular relative inherits the property.

This can equally well be achieved by making a will.

Relieve a person of the worry and responsibility of home ownership.

There are other ways of achieving this such as making a lasting power of attorney.

Avoid the value of the property being used to pay fees in a residential or nursing home, should the need arise.

This is a common reason nowadays, to ensure that the property goes to the family and is not taken by the local authority to cover future residential or nursing home fees. You should always remember that at the present time only one person in every ten aged 75 – 85 spends time in a residential home and therefore the problem is not as severe as many people expect. Of course, you may be that one!

Likewise, most people who move into a home are usually there for a short period of time. A report in the 2020s suggested that less than 1 in 5 would be in a home for 5 years or more.

Local authorities have a duty to assess a person’s need for care and also to assess their ability to pay for it. If the person needs care and has sufficiently little capital or income the authority must arrange their care and ensure that it is paid for. At the present time, a person in England is responsible for making their own payments if they have assets in excess of certain thresholds. The authorities will contribute or pay in full when the assets drop below a certain figure (subject to income being below the appropriate level).

Increasingly the care will not be provided entirely by the local authority, and a person will be encouraged to claim all available state benefits. Any balance of fees after the person has contributed according to the rules, and benefits have been claimed, must be paid for by the local authority.

The local authority therefore has an interest in ensuring that a person who has capital or income does not dispose of it, as that means the local authority must pay more towards their care. A care home or nursing home resident may be treated as possessing actual capital or income that he has deprived himself of for the purpose of decreasing the amount that he may be liable to pay for his accommodation. This includes the giving away of cash, a home, or any other assets.

Remember, if you have more than the cash threshold, then that will be used first before the value of the property is looked at. In any event, the value of your property will be disregarded for the first 12 weeks of a permanent stay, or if it is occupied by your spouse, or a dependent who is under 17 or is over 60 or is incapacitated. And the cost of living in a home may not be as great as you feared – you may find that your income, pension and any benefits go some way towards this.

It may therefore be advantageous to give property away before going into a home, although there can rarely be a guarantee that it will succeed. Even if a donor felt that it was a chance worth taking the following points should be noted (points 5 – 16 apply to all gifts of property’s, whether or not the intention is to avoid having to pay for your stay in a home): –

1. Ability of Local Authority to Set Aside the Gift

The local authority is able to recover property which was given away when the disposal took place less than six months prior to going into care. They also have the power to charge if they could establish that the gift was made with the intention of avoiding charges (and that this was a significant part of the intention), and there is no timescale for this. Obviously, the longer the time between the date of the gift and the date of moving into the residential home, the harder it will be to show that the purpose of the gift was to avoid the charge. If the local authority did charge on this basis, then it is up to the donor to take action if they wish to challenge the decision. There are ways of doing this, all of which entail significant legal expenses and anxiety for the donor as the outcome could not be guaranteed.

2. Ability of the Local Authority to Charge Leading to Bankruptcy

If the local authority can establish that the purpose of the gift was to reduce or eliminate the liability to pay for accommodation fees, then they can charge as if the gift had not taken place. This could then push the person making the gift into bankruptcy and the trustee in bankruptcy could set aside any gifts that had been made in the previous five years. It is only after five years that a person can be reasonably secure in the knowledge that the gift is safe from this method of enforcement.

3. Residential Home Standard

If a donor no longer has the resources to pay their own fees the local authority may only pay for a basic level of care (e.g., a shared room in a home of its choice) so they may be dependent upon relatives to top up the fees if a better standard of care is desired.

4. Anti-avoidance measures

You can be given no guarantees that there is a fool-proof way of avoiding the value of the home being considered in means-testing, since the anti-avoidance measures enable some gifts to be ignored and even set aside by the court. Not only are these measures subject to change from time to time, but it is also unclear how far authorities will go to pursue contributions they believe to be owing to them.

In most cases, the intention behind making the gift is the most important factor. Where the intention is clearly to create or increase entitlement to help from the local authority, measures can be taken to recover the assets given away or impose a charge on the home, even though it is now in the hands of the donee.

However, it is up to the authority concerned to prove that this was a “significant” part of your intention in making the gift.

5. State Benefits and the Donee

The person to whom you gave the property (‘the donee’) may lose entitlements to benefits and/or services (e.g., social security benefits, legal aid) due to personal means testing as they are now the owner of another asset.

6. Dependence on Donee

Once the property has been transferred it is gone forever. If you were to fall out with the donee you run the risk of being rendered homeless. Likewise, if you wanted to move to a smaller property, you could only do so with the consent of the donee because they would be the owner of your property!

7. Difficulties of Selling Following a Gift

A donee may find it more difficult to sell the property within two years of the gift being made. The reason for the difficulty in selling is that a buyer from the donee would always be concerned that for the reasons stated above the trustee in bankruptcy may be able to set aside the gift. Even though the buyer paid good money for the property he/she may have to give it up! The donor could sign a ‘declaration of solvency’ which would go some way towards assisting but does not remove the problem entirely. A declaration of solvency may be used to establish that at the date of the gift the donor was solvent, and this would make it more difficult for the trustee in bankruptcy to set aside the gift.

8. Donee’s Creditors

Once the asset belongs to the donee, then their creditors could claim the property to cover unpaid bills. The donor, therefore, needs to be assured that the donee is financially sound.

9. Donee’s Divorce

Once the property has been given away there may be complications if the donee is subsequently divorced. The property would form part of their assets and it is possible that the court could force its sale. This would make the donor homeless.

10. Inheritance Tax for the Donee

It is possible that the gift could increase the Inheritance Tax liability of the person receiving it. At the present time (2023-2024) a person may leave £325,000.00 before Inheritance Tax has to be paid. This gift may take the donee’s estate above that limit and therefore cause a tax liability to occur where otherwise there might have been none. This is really only relevant if the donee dies before the donor – but that, of course, can happen.

11. Capital Gains Tax for the Donee

For as long as the property is used by the owner as their principal private dwelling-property there is no Capital Gains Tax liability. If it is given to somebody else however, and they are not residing in it, then it becomes an investment property. After allowances, any increase in value of the property from the date of the gift is taxable at the donee’s rate of income tax. This is a tax which would probably not have been paid had the gift not been made.

12. The Cost of Emergency Medical Treatment

Unless the donor has other assets they may find themselves in the situation of having no capital to cover emergency hospital treatment. They cannot mortgage the property or sell it because it is not theirs. Again, they would then be heavily dependent upon the donee.

13. Security for the Donor

The donor ought to obtain some sort of security for him or herself. This is perhaps most easily achieved by the grant of a lease at a nominal rent. This would then give the donor some security regarding their continued future occupation of the property. Alternatively, a trust deed could be created which would declare that the donor had an overriding power to remain in occupation.

14. Maintenance of the Property

The cost of maintaining and repairing the property and responsibility of paying the outgoings are other problems that need to be agreed between the parties at the time that the gift is made so that each person knows exactly what their obligations are.

15. Death of Donee

The chances are that the gift is made to someone younger, but the donee may still die before the donor. Who has the donee left the property to, and who is the new owner, are questions for the donor to discuss with the donee before making the gift.

16. Pre-owned assets

In the 2004 budget, the Chancellor announced measures that resulted in a change in the taxation of gifts. If the donor gives the property away, and yet continues to live in it, they will be deemed to receive a taxable benefit equal to the open market rent of the property. They will then be subject to Income Tax on that benefit! This was because these gifts are often made to avoid Inheritance Tax, and the Revenue wanted to make sure that they collected one tax or the other. The donor can, however, elect to have the value of the property considered for Inheritance Tax purposes on death, in which case there will be no Income Tax to pay. You can therefore choose which tax will apply; you will have to discuss this in more detail with your accountant so that you can decide which the best option is, and then serve the necessary notice on the Inland Revenue.

17. Equity Release and mortgages

If you give away your property, or transfer it into a trust, you will be unable to obtain finance by way of a mortgage or through releasing equity in your property under an equity release scheme should you ever wish to do so.

Summary

If you are going to make a gift, do not leave it until it is too late! At the time of making the gift, a donor must be capable of understanding the nature of the gift (which can be an outright gift or a sale at less than the actual value) and the long-term implications. In particular, you must understand:

 That once given, the property is not yours and belongs to the donee.
 Why the gift is being made
 What is left in your ownership after the gift
 Upon what terms are you to remain in the property – if you are
 Whether the gift is to be made now or later
 The donee may not give it back
 What effect the gift has on your future standard of living
 How the gift affects other family members
 What happens if the donor dies first, or divorces, or becomes bankrupt
 What happens if the donor and the donee fall out
 The value of the gift
 Whether it would it be better to give the property in a will

The unexpected can and often does occur, and the best laid plans can go wrong, so donors should always adopt a cautious approach.

How can we help?
We will explain the legal process and documentation, ensuring that you fully understand the gift of property process. By working with us, you can have peace of mind that your legal requirements are met, and your rights are protected.