You have worked hard throughout your life to acquire assets to give you a comfortable future. You assets may come under threat from taxation, problems in business or marital problems or, as we are now an aging population, care fees.
Your largest asset is likely to be your home. There are a number of ways in which you can consider protecting the value of your house.
Asset protection – transfer of ownership of house
You can protect your house by:
- Transferring ownership of the house to your children
- Placing your house in a trust
- Transferring ownership of half the house on the death of your spouse
Ultimately, only you can decide which option, if any, you wish to choose. You need to remember that in the first two options, you will lose control of the house, and if you decide that you wish to move, then other people have to be part of the decision making process. In the third option, the loss of control only happens after you or your spouse has died.
We would always recommend that you discuss your plans with your family.
There are a number of points to consider:
- When deciding whether to transfer your property to your children, you should be aware of the following:-
- Your children would own the property from the date of the transfer. You would no longer have control, and if you wanted to move, the decisions about a sale would be for your children to make.
- If one of your children predeceased you, the share of the house transferred to that child would then pass to the beneficiaries of his or her estate. The beneficiaries could, for example, be the children, spouse or partner of the deceased child, or indeed someone completely outwith the family. This could cause serious problems.
- If one of your children was in serious financial difficulty at some point after the transfer, it is possible that he or she would have to sell his or her share in order to pay off any debts owed. This could adversely affect the other children’s ability to sell or otherwise deal with the house in the future. Furthermore, people with large debts can be prevented by their creditors from selling property.
- If one of your children divorced or separated from his or her spouse after the transfer, it is possible that his or her share in the house could be taken into account in determining a financial settlement between that child and his or her spouse.
- Your children might face a Capital Gains Tax liability when the property is ultimately sold.
- There might be Inheritance Tax payable following the transfer. Although, normally, gifts are exempt from Inheritance Tax seven years after the date they are made, the fact that you would be continuing to live in the property after the transfer means that the transfer would be deemed to have been a “gift with reservation of benefit”.
- If any of your children wanted to apply for means tested benefits, their ownership of an asset might prevent them from being eligible to receive these.
- If in the future you have to go into residential care, the value of the property could be taken into account for the purpose of calculating any benefit which to which you might be entitled. This would depend upon the regulations in force at the time. Currently, each Local Authority’s Social Work Department has its own interpretation of the rules, and this varies from Council to Council, and can change from time to time. As things stand, you may not be entitled to receive any help from the Council with the cost of care, beyond the personal care and nursing care allowances, which you may be eligible for because your capital, taking into account the value of your house, would be deemed to exceed the current limit. Sometimes your children could be required to sell the house in order to meet your care costs. In other circumstances you would not be entitled to force your children to contribute towards your care costs unless there was an agreement to cover this, and this may mean you have to accept a lower standard of care than you might like.
Use of a trust
As an alternative to an outright transfer of the property to your children, you can use a trust.
You would create a trust which would provide that you were entitled to the use of the trust assets during your lifetime and on your death these assets would then pass to your children. You would then transfer the ownership of the house from your names to the trustees’ names. The trustees can be the two of you and one or more of your children, or you can have non-family trustees. If any of the potential risks referred to above actually become real as far as your children are concerned, this has no impact on the trust although they may have to resign as a trustee.
Should you both finish up in care then the house would be sold and the money from the sale of the house would stay in the trust. You would continue to be entitled to receive the income which that money would generate but the sale money would not pass to your children until after you had died.
By using a trust you are completely protected from anything which happens to your children. For capital gains tax purposes, while either or both of you are living in the house the house would continue to qualify for your personal private residence exemption and no capital gains tax liability would arise. There is no Inheritance Tax benefit in using a trust but equally there is no additional downside.
The halfway solution
In between an outright transfer to your children and the use of a Trust there is another possibility which is sometimes used. That is to split the title to the house so that on the death of one of you the house will not automatically belong to the survivor. Each of you will have a distinct one-half ownership of the house which you can pass on under your own Will. It is then possible for each of you to leave your half of the house to your family, subject to a provision that entitles the survivor to continue to live in the house. The alteration to the title cannot be challenged by the local authority. Providing the first of you to die is not in care and receiving public funding then that half of the house passes to the family and cannot become liable to any care cost charges in the future. That means that if the survivor has to go into care it is only his or her half of the house which becomes liable.
This option as you can see only works if events happen in a particular order – i.e. the first to die is not in care and receiving public funding. The family would potentially be liable to capital gains tax on the increase in value of the half of the house which they inherited between the first death and the subsequent sale of the property. The risks outlined in paragraphs two three and four above would still apply, although they would be moderated slightly by the fact that the survivor would be guaranteed the right to occupy the house.