You may want to give your property away, perhaps to reduce your inheritance tax liability or reduce possible future care fees. It can be advantageous to do this; however, once the property has been transferred it is gone forever. There are many risks associated with giving your property away and no guarantee that it will succeed.

Deliberate Deprivation of Assets

If you go into care, you will be asked if you have ever owned a property so that your care fee contributions can be assessed. 

If you have given away your property less than six months before going into care, your local authority can recover that property. 

The local authority can also look further back and have the power to assess you as if you owned a property if they can establish that a gift was made with the intention of avoiding care fees. This is known as ‘deliberate deprivation of assets’. The longer the time between the gift and the date of moving into care, the harder it will be to show that the purpose of the gift was to avoid the fees, but there is no timescale on how far back they can look.

If the local authority makes this decision then it is up to you to challenge them, which can cause significant legal expenses and anxiety.

Bankruptcy

If the local authority establishes that the purpose of a gift was to reduce the liability to pay for care fees then they can charge as if the gift had not taken place. This could push you into bankruptcy and any gifts made in the previous five years could be set aside. This also applies if you become bankrupt for any other reason. It is only after five years that you can be reasonably secure in the knowledge that a gift is safe from this method of enforcement. 

Care Home Standard

If you give away your main asset and no longer have the resources to pay your fees, the local authority may only provide a basic level of care (e.g. a shared room in a home of its choice) so you may be dependent upon relatives to top up the fees if you desire a better standard of care.

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 equity release should you ever wish or need to do so.

Medical Treatment

Unless you have other assets, you may find you have no capital to fund medical treatment. You would then be heavily dependent upon family members.

Dependence 

If you fall out with the person you gave the property to (the “donee”) you run the risk of being rendered homeless. Likewise, if you wanted to move, you could only do so with the donee’s consent because they would be the owner.

Security 

You can give yourself more security by arranging a lease at a nominal rent. This would give you some assurance regarding your continued future occupation of the property. Alternatively, a trust deed could be created which would declare that you have an overriding right to remain in occupation.

Maintenance 

The cost of maintaining and repairing the property and responsibility of paying the outgoings should be agreed between the parties when the gift is made so that everyone knows what their obligations are.

Selling the Property

A donee may find it more difficult to sell the property within two years of the gift being made given the bankruptcy rules above – even though the buyer paid good money for the house they may have to give it up. You could sign a ‘declaration of solvency’ which would assist but it does not remove the problem entirely. 

State Benefits 

The donee may lose their 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.

Donee’s Creditors

Once the asset belongs to the donee, then their creditors could claim the house to cover unpaid bills. You therefore need to be assured that the donee is financially sound.

Donee’s Divorce

If the donee subsequently gets divorced, the house would form part of their assets and it is possible that the court could force a sale. This could make you homeless.

Donee Tax implications 

If the house is used by the owner as their principal private dwelling-house there is no Capital Gains Tax liability. However, if it is given to somebody else 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 due otherwise.

It is also possible that the gift could increase the donee’s Inheritance Tax liability as the size of their estate will increase and may exceed the Nil Rate Bands allowed. This is also a tax which may not have been due otherwise.

Donor Tax implications 

If you give the property away and do not live in it, you may still be liable for Inheritance Tax if you die within seven years of making the gift. 

If you give the property away and continue living in it, you will be subject to Income Tax as you will be deemed to receive a taxable benefit. You can, however, elect to have the value of the property taken into account for Inheritance Tax purposes on death instead so there would be no Income Tax to pay. You can choose which tax will apply but will need to discuss your options with a financial adviser.

Death

Gifts are usually made to someone younger, but the donee may still die before you. You should therefore discuss with the done who they will leave the house to before you make the gift. 

You should always take professional financial and legal advice before giving away your property. Contact Williamsons today on 01482 323697 to see how we can help.