Inheritance Tax and Conveyancing
Saving on Inheritance Tax can cost you much more money in the long run!
It’s not uncommon for us to be asked to transfer a property into the name of our client’s family (usually their children or grandchildren) without money actually changing hands.
When we ask why the client wants to give their property away for free, we’re often told that it’s in order to save money.
Usually the client will have read or heard about what will happen to their property when they die, and how much inheritance tax the beneficiaries of their estate may have to pay when that time comes. Also they may be worried about how much of their property will have to be used to pay for a nursing home if they cannot look after themselves when they get older. They assume that if they no longer own the property, none of these things will happen and so they will be saving themselves and their family money.
No one likes to pay any more taxes than they have to, and in theory transferring the property into someone else’s name will avoid that.
However, if it’s not a legitimate transaction, it can be challenged by the authorities (ie the tax man), and even if it’s not challenged, such a transaction can cost you much more than you are trying to save.
Let us explain.
If someone is transferring a property in these circumstances, it will almost certainly be the case that the original owner wants to remain in occupation of the property.
Their idea is that they will continue to live there until they die, and the only thing that will change is whose name is registered at the land registry. Instead of being their name, it will be in the name of perhaps their grown up children, being the people they would want to inherit the property when they die.
So as far as the outside world (most importantly the tax man and the local authorities) is concerned, the children own the property. In fact, unless the authorities decide to challenge the transaction, that is absolutely the case.
The children do own the property and this can be a problem that the parents may not have anticipated, because although the client believes that they have an understanding with their children that the property really still belongs to the parent, the law wouldn’t necessarily see it like that.
Our client will always tell us that they trust their children implicitly, and that although they understand that legally, the house belongs to the children, their children would never expect them to leave.
Sadly, it’s not that straight forward.
Firstly, it does sometimes happen that things change and the parents and children fall out, in which case the children can ask their parents to move out and they are likely to be able to make their parents homeless.
Secondly, even if relationships don’t change, problems can occur due to circumstances beyond everyone’s control that could not have been foreseen at the time of the transfer of the property.
let’s imagine that someone transfers their property to their adult son, who at the time of the transfer is happily married and living in another property with his wife and children. A few years later, the marriage sours and the wife kicks the husband out.
They go through a messy and acrimonious divorce during which both sides have no choice but to declare all of their assets. The parents’ house, which is now in the son’s name, is one of those assets, and so the husband will have to declare it. The wife will be able to argue that she shouldn’t have to sell the matrimonial home and give him a share of the proceeds of sale, because he’s got another property he can live in, or sell and use the proceeds.
Even worse, if the parents’ house is more valuable than the matrimonial home (or perhaps has more equity because the parents have paid off the mortgage), she could demand that it be sold so she can have a share.
Another problem could come if the adult son dies, or goes bankrupt.
In either scenario, the parents’ house will become an asset within the son’s estate, and his trustee in bankruptcy or the executor of his estate will be expected to sell the property and distribute the proceeds of sale either to his creditors or his beneficiaries.
In the death scenario, it is possible that the son will have written a will as part of his arrangement with his parents, that would transfer the property to perhaps another sibling with the same understanding, but the son’s estate will now be subject to the inheritance tax that the parents were trying to avoid.
What’s more, wills can be changed and challenged. So you could end up in a situation where the son’s widow lays claim to the parents’ property and the costs of resolving the matter could by far outweigh the tax the parents were trying to save.
It is possible for the son to grant his parents some kind of licence, tenancy or lease over their house, so that they would have a degree of protection from eviction in one of the scenarios above.
However, in order to stand up to external scrutiny, and so be enforceable, the licence, lease or tenancy would have to be for a reasonable sum of money, which would be something around the amount the property would be let for on the open market.
Whilst all the parties are on good terms, and nothing is going wrong, the parents and the son might agree that the rent just won’t be paid (or would be paid and then paid back) as no one will know, but if there were to be a challenge by anyone in the future (eg if one of the scenarios above occurred) the fact that no rent had been paid (or had been paid and repaid) will be easy to prove, and will further discredit the transaction.
What’s more, at any point the son (or his ex wife, his trustee in bankruptcy or the executors of his estate) could start insisting that the parents pay the rent, and if they can’t afford to, the tenancy or lease can be bought to an end. This would mean they would lose their home.
Ultimately, tax evasion is a type of fraud.
So either it is a legitimate transfer of the property to your children, in which case the property is theirs and they can do with it what they wish (including throwing you out and selling the property) or it’s not a legitimate transaction, in which case it is subject to challenge and the parties could possibly be prosecuted for tax evasion.
The bottom line is that it’s better to safely retain your home, and risk paying some tax on it, than it is to risk losing everything. If paying inheritance tax is of particular concern to you, there are still steps that you can take to limit your liability.
We would strongly recommend that before you consider any kind of tax planning, please consult an expert on taxation to consider all of the pros and cons. Our Expert Panel of Conveyancing Solicitors can recommend a Tax Adviser should you require advice.
Contact us on 0800 799 9892 to discuss your circumstances in detail today.
Disclaimer – our articles are designed to give you guidance and information. There is no substitute for proper direct advice, particularly as everyone’s circumstances are different. If anything in this article may affect you, please contact us for advice that is specific to your circumstances.