Gifting the family home – tax traps and other pitfalls

Partner Antony Caulfield

Antony Caulfield, Private Client Partner, writes about the issues that can arise when gifting the family home.

Clients often come in to see me with the intention of gifting their property to their children in their lifetime as they believe this will save tax or protect the property in the event that they go into long-term care in the future. There are a number of tax traps and other potential pitfalls, which can arise from gifting the family home, which clients often do not fully consider.  I have highlighted some of the main problems that can arise:


Rather than saving tax, a gift of the family home, in someone’s lifetime, can often result in additional tax being paid.  For inheritance tax purposes, if the person giving away their home continues to live there rent free, this is considered a gift with reservation of benefit. The effect of this is that the seven year period that, the inheritance tax rules say you have to survive for, from the date of the gift, for a gift made in your lifetime not to be taken into account on your death, does not start to run until the person making the gift ceases to reserve a benefit in the property. Therefore, unless the reservation of benefit ceases, the value of the property will still be taken into account, for inheritance tax purposes, as part of the estate of the person making the gift, on their death.  To avoid a reservation of benefit arising, the person who gifts and remains in the property would need to pay a full market rent for continuing to live there, which in my experience they will often be reluctant to do.

In addition, if the beneficiaries of the gift of the property do not live in the property, then, when the property is sold in the future, they will have a potential liability to capital gains tax, on any sale, if the property has increased in value between the date of the gift and the date of the eventual sale of the property. This contrasts with the position if the person who gives the property away had not done so and had continued to own the property themselves, where capital gains tax would not be payable, in those circumstances, if they sold the property in their lifetime, as any capital gain on the property would be exempt, as the property is their main residence.

If the beneficiary or beneficiaries of the gift of the property did not own a property themselves and were looking to buy their own property in the future then those beneficiaries may end up paying additional stamp duty land tax as a result of owning a share of the gifted property as they would no longer qualify as a first time buyer and may be subject to additional stamp duty land tax rates.

Funding for local authority care

Clients are often under the misconception that if they give away their property and then require long-term care in the future, the value of the property will not be taken into account by the local authority, on any financial assessment, in determining their eligibility for local authority funding for any care costs. Unfortunately this is not always the case, as there are deprivation of assets rules which apply, which means that if a significant reason behind the gift was to avoid paying for long-term care, then the local authority will still assess the person who gave the property away, as owning the property even though they no longer own it. This will mean in those circumstances that the person who made the gift of the property will still be responsible for the cost of their care.  There is no time limit for deprivation of assets to apply and the intention of the person making the gift of the property at the time of the gift is key.  In the absence of a good reason for the gift, the local authority are extremely likely to argue that avoiding paying for the cost of care was a significant reason behind the gift and therefore the deprivation of assets rules will apply.

Change in family circumstances

Giving away your property means that you are then reliant upon your child or children, as the beneficiaries of the gift, who receive the property, allowing you to continue to live in it.   Clients will often say that as they are a very close family they have complete trust and confidence in their children, to allow them to continue to live in the property, but fail to consider fully that even in the closest of families unforeseen circumstances can arise, which may put their continued occupation of the property at risk.  The three most common examples are, if one of the children were to die before them and their beneficiary wanted to realise their share of the property, or one of the children were to divorce where their share of the property would then become an asset in those divorce proceedings, or if one of their children were to be declared bankrupt when again, that child’s share of the property would be an asset, which could potentially be taken into account.  In light of this it is very important to fully consider and be comfortable with the risks involved, before proceeding with a gift of your property.

Limiting your options if your circumstances change

By retaining your property this gives you the flexibility to raise capital from the property if your financial circumstances change in the future.  This could be achieved by looking to downsize to a cheaper property or possibly raising a mortgage on the property.  For most people their property is their main asset and by giving this away, it will mean you will lose the ability to raise money from your main asset in the future, if your circumstances do unexpectedly change.  Also, if you have given your property away and wish to move to a different property, this would then mean you would be reliant on your children, as the owners of the property, agreeing to this and purchasing a new property for you to live in.

In conclusion, as is evident from the above, there are a number of potential tax traps and other pitfalls, which could arise from giving your property away in your lifetime, and therefore it is imperative that anyone thinking making a gift of their property, takes proper advice to consider fully all the potential implications arising from making the gift, before proceeding.


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