Inheritance tax and gifting money
Making gifts of money or other assets during your lifetime can be a way to reduce the amount of inheritance tax (IHT) on your estate after you die. But this must be done within certain limits to ensure that gifts made during your lifetime are not liable for IHT when you pass away.
You can give away up to £3,000 per year, tax-free, plus unlimited smaller gifts of up to £250 per individual. There are additional allowances for money given as wedding presents. You can also make unlimited gifts to a spouse or civil partner, and charitable gifts are tax-free.
Anything that exceeds the gift allowances will potentially be liable for IHT. However, this will depend on how long after making the gift you die. For example, if you live for seven years after making a gift, it will normally be IHT-free.
Visit Which? Money for detailed advice on inheritance tax and giving gifts.
Can I give away assets to avoid care fees?
Arranging care in later life is expensive. Anyone who has assets above a certain level – including, in some cases, the value of their home – will have to pay for some or all of this care themselves.
For example, if you need to move into a care home and you have savings and assets worth more than the following thresholds, you won’t be eligible for local authority funding and will usually have to fund your own care.
- £23,250 in England and Northern Ireland
- £28,500 in Scotland
- £50,000 in Wales
Different thresholds apply for funding care at home.
So, it might be tempting to give away some of your assets to try to reduce your capital and help you qualify for care funding. But be aware, there are strict rules for gifting assets, and there can be serious consequences if you do this incorrectly.
For example, if the local authority believes you intentionally reduced your assets to increase your chances of getting financial support, it may regard this as a ‘deliberate deprivation of assets’. If so, the assets you’ve given away will still be taken into account when the council assesses your ability to pay for care.
Read more below about what is, and is not, considered a deliberate deprivation of assets.
there are strict rules for gifting assets, and there can be serious consequences if you do this incorrectly.
For many people, their home is likely to be their most valuable asset. So it’s not unheard of for people to consider ‘gifting’ their property or other assets to a family member or friend when facing the financial assessment for residential care.
Before considering this step it’s very important to be aware of the strict guidelines on giving away property. It is advisable to seek legal advice before transferring ownership of a property to someone else.
- Find out more: Legal transfer of property
Deliberate deprivation of assets
Deliberate deprivation of assets is when the local authority deems that a person has deliberately disposed of assets to increase their eligibility for social care funding.
When a local authority carries out a financial assessment for care it will ask about previously-owned assets, not just those that are owned currently.
This might include giving away (gifting) assets, as well as other courses of action, such as selling an asset for less than its true value. For example, there have been cases of people ‘selling’ houses to a relative for a nominal fee such as £10, just so that they can transfer the legal ownership. If avoiding care costs is considered to be a significant reason for the disposal, then it may be considered a deliberate deprivation of assets.
Here are some examples that could be considered as deliberate deprivation. There can be implications to ‘gifting assets’ in these ways, for both the person giving away the assets and the person receiving them.
- gifting money or expensive items, such as a piece of jewellery that has recently been purchased, to family members or friends
- putting money into a trust or tying it up in some other way
- gifting property by transferring it into someone else’s name
- selling an asset, such as a property, to someone for less than its true worth.
When deciding if deprivation was ‘deliberate’ the local authority might look at the following aspects.
- Motive: when disposing of assets, was the main reason to avoid care charges?
- Timing: there is no set time limit, although local authorities are unlikely to investigate too far back. Most importantly, they will look at the time between the person realising that they needed care and the disposing of assets.
- Amount: was the gift a significant amount that would make a difference to your capital limit? The asset would have to be worth a significant amount for the local authority to pursue this action. Giving away a £300,000 property, for example, would significantly affect your total capital whereas smaller gifts – such as giving a £300 ring to a granddaughter – are unlikely to prompt further investigation.
It all boils down to intention. When you made the gift, could you have reasonably known that you might need care? For example, if you fell ill, were assessed as needing residential care, then signed your property over to a relative the following week, that would look suspiciously like ‘deliberate deprivation’.
Are all gifts a deliberate deprivation of assets?
No, not all disposals of assets are necessarily deliberate deprivation. It might have nothing to do with care, especially if there was no consideration of paying for the cost of care at that time.
- You might want to give tax-free sums of money to children or grandchildren, so that you can enjoy seeing them spend it and to avoid inheritance tax.
- You might also want to help family members who are struggling financially or splash out on a well-deserved ‘holiday of a lifetime’.
- If you went on an extravagant cruise while you were still in good health and had no idea that you would need care, this might simply be regarded a post-retirement treat.
Giving away capital can therefore have serious consequences. If a person is found to have ‘deliberately deprived’ themselves of assets, the value of these assets can still be taken into account in the financial assessment, even though they no longer own them.
The value of the assets that they used to have is called ‘notional capital’. The value of a person’s notional capital can be added to their remaining assets to form their total financial assets for the financial assessment. So, in the example of transferring ownership of your home, not only could you end up having to pay for your care, you might no longer have a house to fund those costs.
Transferring assets into a lifetime trust
You can use a lifetime trust to transfer ownership of assets, such as money or property, while you are still alive rather than giving them directly to a person. Assets placed in a lifetime trust are managed by one or more trustees, and if you live for more than seven years after creating the trust, assets would not form part of your estate.
It is sometimes suggested that transferring your property into a lifetime trust could help you to avoid care fees. However, it is generally not advisable to use a lifetime for this purpose. If you are assessed for local authority care funding, there is a significant risk that any assets you have moved into a lifetime trust could be seen as a deliberate deprivation of assets.
Lifetime trusts can be an effective way to pass on assets to a minor or someone who needs the help of trustees to manage their finances. With the correct financial advice, they can also be an effective way to manage the inheritance tax burden on your estate.
Read more about inheritance tax and trusts on Which? Money.
Powers of recovery and your right to appeal
If the local authority funds someone’s residential care costs and later rules that a person has ‘deliberately deprived’ themselves of assets, they have the power to claim care costs from the person that the assets were transferred to.
Legally, local authorities have the power to recover costs by instituting County Court proceedings. However, a local authority should only do this after it has tried other reasonable alternatives to recover the debt.
The council’s decision must be reasonable and there is a right of appeal if you feel that an unfair decision has been made. If you want to make a complaint or appeal a decision, you should contact your local authority.
Potential risks of gifting money or assets
- It’s permanent: there’s no going back. Once you have given a gift to someone, you can’t change your mind.
- Loss of financial security: assets might be needed for other unforeseen costs in the future. You might want to move house or pay for care in your home, for example. If you have disposed of assets, you might not have money when you need it for other things.
- Loss of choice and control: reducing assets will leave you financially vulnerable and limit the choices you have in the future.
- Situations/relationships can change: someone that you trust to ‘hold on to’ a valuable asset, or own your property ‘in name only’ and pass money to you at a later date, might not always live up to their end of the bargain.
- Divorce/bankruptcy: you might give your house to someone on the understanding that they can stay living there. If the person receiving the gift gets divorced or goes bankrupt, however, the house may have to be sold to form part of a divorce or bankruptcy settlement. This could leave you homeless.
- Capital Gains Tax: if you, or the person that you give the gift to, makes a profit from that asset you may be liable for Capital Gains Tax. This is often the case with second homes. Read Which? Money’s guide to Capital Gains Tax for more information.
Seek legal advice
If you’re considering gifting any assets, particularly transfer of a property, you’ll need to seek legal advice to make sure it’s done properly. The Law Society has produced detailed guidelines for solicitors on gifts of property and their implications for long-term care. Make sure that any solicitor you speak to is aware of these guidelines.
You can give your home to your children, even while you’re still living in it. But be aware of the complex rules.
What is a Power of Attorney and why should you set one up? We also explain about Lasting Power of Attorney.
From reviewing your pension options to making a will, here’s how to put a financial plan in place for later life.