Gifts of Homes

Some of our clients seriously consider making a gift of the home in which they live, often to their children, in the hope of avoiding a charge by Social Services, should the client ever need to go into care.

With the Rules as they stand the property can be protected from a Social Services charge, by making a gift of it - either directly to your family or into trust - but there are at least three reasons why such a gift might not prove to be effective, and there are at least four major risks which you take.

Remember that there's NO POINT AT ALL in trying to protect your home if you've got other substantial assets which Social Services can "grab".

Why a gift might not work

There are three circumstances in which the gift might prove to be ineffective, and these are:

1. If you go into care within six months of a gift then the recipient of the gift (that is, either your family or the trustees) will themselves be liable to pay for any care you receive - up to the value of the property gifted. If this rule applied then the gift would have had no positive effect whatsoever.
   
   
2. The Income Support regulations and the Social Services charging regulations both contain a provision (known as "the deprivation rule") to the effect that they will treat you for the purpose of calculating Income Support, or contributions to your care in a home, as if you still owned any property which you have given away. In the past, this rule had not been interpreted so strictly as to refuse care to a person who needs it, but belts are constantly tightening at local authorities and there has been a test case where Social Services cut off a patient's funding altogether, and the courts upheld their right to do so. This is a very real risk.
   
   When working out whether the deprivation rule applies, the DSS or Social Services will look at your motive in gifting the property. The fact that you've read this article could be enough evidence, by itself, to make you fall foul of the rule.
   
   
3. If you are receiving care at Social Services expense, which you cannot pay for yourself because you no longer own the house, then Social Services could make you bankrupt. If they do so then your "Trustee in Bankruptcy" is entitled to go back to gifts you have made in the past, and have them "set aside" - meaning that the property would become part of your estate again and Social Services could charge it. Our experience is that this rarely happens in practice, but the threat is often used as a bargaining counter to encourage families to contribute towards their relatives' care.
   

Items 2 and 3 above don't necessarily have time limits attached. Social Services often used to say that they'd ignore gifts which were more than five years old (because one of the time limits in the Insolvency Act is five years) but now, as a result of the test case mentioned above, they will be prepared to refuse care however long elapses between the gift and the patient entering care.

What other risks are there in making a gift?

The main risk of gifting a property directly to your children is that your children may one day decide to push you out of the property into a nursing home (or somewhere else) so that they can sell the house. Many people do not see this as a great problem, believing that their children will always "see them alright", but you should remember that firstly people don't always live up to your expectations of them, and secondly there are four circumstances in which the matter would be taken out of your children's hands, and put into the hands of someone else (possibly a professional with a different agenda):

1. The death of one of your children (who have almost certainly not named you as the beneficiaries of their Wills).
   
   
2. The divorce of one of your children (in which case your property could be considered an asset in someone else's divorce settlement).
   
   
3. The mental incapacity of one of your children (in which case his or her Receiver might require their interest in the property for the benefit of the patient).
   
   
4. The bankruptcy of one of your children (in which case the house would almost certainly be sold by the Trustee in Bankruptcy, one year from the date of the bankruptcy order).
   

Are there any tax disadvantages?

1. Because you are giving the property away and then continuing to live in it, the gift won't have any favourable Inheritance Tax effects (in the way that other gifts often do).
   
   
2. Gifts of this kind cause the asset to be considered part of the recipient's estate (either the trust's or the children's) as well as yours. With an outright gift to your children, if either you or they were to die then the property would be charged to Inheritance Tax.
   
   
3. Usually there is no Capital Gains Tax when a person sells the property in which they live. In your case however, once you have made the gift the people living in the property won't actually be its owners, and accordingly there is likely to be Capital Gains Tax on an eventual sale.
   
   
4. Capital Gains are usually wiped out completely on a person's death. If the property is no longer yours, however, then your death will not wipe out Capital Gains on it.
   

This fact sheet is intended as a guide and should not be used as a substitute for full professional advice.

Contact:

David Endicott
Partner

Lucy Gordon
Associate

Emily Stacey
Solicitor