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Think twice before giving your house to your children

As we get older, many of us fear that the money we’ve spent a lifetime earning will be swallowed up in care home fees or inheritance tax.

Faced with these fears, some people consider handing over their homes to their children so it’s beyond the reach of both the taxman and care home providers.

Unfortunately, the reality is more complicated and fraught with difficulties.

The first issue is that if you hand your home over to your children you would need to move out of it and live for another seven years before it became exempt from inheritance tax after your death.

If you hand it over but continue to live there then it would be considered as a "gift with reservation of benefit" and so would not be exempt from inheritance tax, even if you live for another seven years.

You might be able to get round this by paying a market rent to your children for staying in the house but then they would be liable to pay income tax on that rent.

One option that might help is to give a half share of your home to your children and then have them move in with you. As long as you share the bills and survive seven years, the half you give them should not be subject to inheritance tax.

It’s very difficult to avoid care home fees by giving away your home. Your local authority is likely to take the value of the home into consideration even if it is no longer in your name.

It can overturn the gift under the Deprivation of Assets rule and is likely to do so if it believes you were simply trying avoid liability for care costs.

There are other factors to consider. If you give away your home you won’t be able to use it as security for a loan if you suddenly need to raise money.

You also lose control over your future. Your children will probably be nice, of course, but if they suddenly need to raise money themselves, they may put you under pressure to leave your home so it can be sold.

There may also be problems if your child’s marriage breaks up and the house becomes part of the divorce settlement, or your child may become bankrupt and the house is used to pay creditors.

There is also the chance that you may outlive your child. In that case the house would pass on to his or her beneficiaries who may feel less connection with you and so less amenable to letting you continue to stay in what will have become their property.

There may be some advantages to giving your home to your children but you should take great care and get expert advice before making a decision that will affect the rest of your life.

Please contact us if you would like more information about the issues raised in this article.

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