What happens when someone dies? Probate or Letters of Administration - The Pitfalls
For many people, their main asset is likely to be their home. With rising property prices, some may wish to ensure that they have taken the necessary steps to enable this to pass in its entirety to the next generation. However, when gifting your residence there are some considerations that should be taken into account. These are the following:
Inheritance Tax
If you give away your property but continue to reside there, then the “Reservation of Benefit” rules may apply. In this instance you may still be treated as owning it for inheritance tax purposes unless you pay a full market rent to the recipient of the gift. Many people worry that inheritance tax will be payable on their estate but do not realise that the introduction of the transferable nil rate band and the new residence nil rate band means that some estates will no longer be subject to inheritance tax in the future.
Capital Gains Tax
If you gift or sell your only or main residence, then you should not pay capital gains tax on any increase in value due to the availability of Private Residence Relief. However, if you gift your property to someone who does not reside there, they may incur a capital gains tax liability if they later sell it and it has risen in value.
Income Tax
The “Pre Owned Assets” rules are a complex set of tax rules that are often overlooked and may apply in a number of situations. For example, if you sell your house and gift the sale proceeds to your child, who later buys a property in which you can reside, then (even though there may be no Reservation of Benefit for inheritance tax purposes) you may need to pay income tax calculated on a deemed market rent.
Care Home Fees
If you give away your property and later go into a care home, then you run the risk that a Local Authority may argue that you have deliberately deprived yourself of an asset in order to avoid paying care home fees. The Local Authority may seek to claw back the gift.
Other problems
Your home may be your financial security for the future. Once you have gifted it then you can no longer use it to raise capital for yourself through an equity release scheme or by downsizing. You may need to rely on the generosity of the person who receives the gift. If that person dies, gets divorced or becomes bankrupt then your home may suddenly be at risk.
Although the rules may appear fairly straightforward, they are in fact very complex. You should think carefully before gifting your residence and should certainly not do so without taking professional legal advice.