In most cases, failing their spouse or partner, their children will inherit their property in their Will. Whilst it is most often the case children will inherit property after death, many clients consider gifting property to their children during their lifetime for a variety of reasons, however, they are often unaware of the reality of doing so. We will be covering the different ways you can gift property to children either during your lifetime or in your Will and the consequences of each option.
Age of Registered Owners
It is important to note that in Scotland the age of legal capacity and therefore the automatic presumption if not otherwise disputed that a child will inherit from a Will is 16. Although this may be the legal age to inherit, you cannot be a registered property owner in Scotland if you are under the age of 18.
Therefore, any property gifts to children done through a Will, must be held until they are 18, or sold. Any property gifts during a child's lifetime can only be granted after the child has attained the age of 18.
Gifting Property in Your Will
Prior and Legal Rights
Gifting property to your children in your Will is fairly simple. The general rule is if you do not have a spouse or civil partner, then you are freely able to gift your property to whomever you choose. Both spouses and civil partners have what is known as prior rights, which entitled them to a share in a property they have lived in, up to the value of £473,000.
Whilst you can still choose to leave your property to your child if you are married or in a civil partnership, however, it is important to note that your spouse/civil partner will have a claim, which is extremely difficult to defeat.
If you do decide to leave your property to your children in your Will, you will be gifted additional tax relief by doing so.
Ensuring Your Property is Yours To Gift
To gift a property in your Will, it must either be in your sole name, or you own 50% of the property in your sole name. It is a common misconception that if you buy your property with another person or people your share is yours to gift how you wish, however this may not always be the case. When a property is bought and the new owners registered you can put what is known as a survivorship clause on the title.
This would mean that when either party who owns the property passes away, their share automatically passes to the other person. This cannot be overturned or trumped by a Will. If there is a survivorship on the property it must be removed if you wish to gift your share to someone who is not the other named person on the title. It is important to check when leaving a property that you do not have a survivorship clause on the property, this is something we can do for you.
Gifting Property During Your Lifetime
Many people decide they would rather gift their property to their children whilst they are alive, this is done for many reasons, but the most common is to avoid the property potentially being sold to pay for future care costs. People are often unaware of the fallibility of using this method to avoid care costs and understanding all of the risks of gifting property is of vast importance if it is a consideration.
No Longer Owning Your Property
Whilst this may seem an obvious consequence of gifting your property, however many people do not actually consider what this will mean for themselves. The person who is gifted the property may lose it as a result of their own personal circumstances, for example through divorce proceedings, the property may be seen as a matrimonial asset and sold in the splitting of such.
Additionally, if the child you gift property to faces any financial trouble, as the property is now seen as their asset it may require to be sold to pay off any debts incurred by that child. It could be simple as the child deciding to sell the property against your wishes and if they are the owner's it is their choice to do so.
When transferring ownership of your property, obvious it is that you are passing on the property to someone else, sometimes what this can mean is not as clear. As soon as that property is no longer your asset, you do not have any real control in what happens to the property, which may mean you lose it.
Gifting Your Property to Avoid Care Costs
A seemingly advantageous reason to transfer the title of your property to your children is to avoid potential future or impending care costs. When a person goes into care the local authority will do an evaluation of their assets and can force the sale of a property in order to pay for that persons care. An ideal solution many believe would be to transfer their property to their children so it will not be taken into account when an evaluation is carried out.
However, a local authority do have the ability to challenge the gift and any transfer of title if they believe it looks like what is known as 'deliberate deprivation of assets', essentially if it looks as though you have transferred the property in order to avoid future care costs.
In cases where the property is transferred after it appears obvious that someone will most likely or definitely be going into care. For example, after a degenerative or terminal diagnosis, it is easy for the local authority to challenge the validity. Nevertheless, the local authority can go back in not so obvious cases, in fact local authorities have been known to go as far back as thirty years to challenge a property transfer and use it for care costs.
It may be a risk some would be willing to take, through the conveyancing expenses incurred may prove futile in the end. Whilst purposely trying to avoid care costs is not allowed, it would be naive to deny that this can be done through different kinds of Trusts.
You cannot take out a Trust for the sole purposes of avoiding care, that would then risk the Trust entirely for such purposes. There is an abundance of different reasons why you may choose to take out a Trust.
Tax on Gifted Properties
If you choose to gift your property to children then it may be subject to Capital Gains Tax (CGT). If you were to buy the property and immediately gift it to your child, so long as the market value does not increase in the interim it will not be subject to CGT. If you have had a property for a while then CGT will be charged on any profit arising.
The market value is calculated and it is then substituted for any such sums paid by the child for the property, CGT is charged on the gain seen to arisen.
The gain which is subject to CGT is worked out by:
Increase in value between the date the property was bought and the date of disposal (date of passing to the child) - the purchase price and any capital improvement costs which will be associated with purchase or gifting costs e.g. estate agent or conveyancer legal fees.
If you have not already used your CGT annual exemption, then no CGT is paid on the first £12,300. Additionally, if you ae gifting the only home you own and you have lived in this as your main home for the entirety you have owned it, you may not have to pay capital gains tax at all.
There are many reasons that may make it seem a good idea to gift your property to your children. However, it is important that all considerations noted above are well thought out and you are comfortable taking on any such risks. If you would like to discuss any of this in more detail, or your different options, please contact us on 0330 390 920 or click Contact Us at the top of this page.
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