For many people, their home is their most valuable asset. Naturally, they want to ensure it passes to their loved ones without complications. However, two common concerns often arise:
- What if I need long-term residential care in later life?
- What if inheritance tax results in my home needing to be sold to cover the bill?
At Ison Harrison, we regularly advise clients on how to approach these issues carefully and legally. It’s vital to seek expert advice early, as attempting to make changes without a clear plan can lead to unintended – and sometimes costly – consequences.
Understanding Inheritance Tax and Your Home
Every individual has a tax-free inheritance allowance (known as the nil rate band) of £325,000. If you’re married or in a civil partnership, this allowance can be combined, giving you a joint threshold of £650,000. There’s also an additional residence nil rate band of up to £175,000 per person if you leave your home to direct descendants – potentially allowing a couple to pass on up to £1 million tax-free.
However, if your estate exceeds these thresholds, anything above – save for some specific exceptions – is taxed at 40%. Understandably, some clients consider transferring their home to their children during their lifetime to reduce the value of their estate. Whether this is advisable depends on their specific circumstances, and there is also the risk that it doesn’t work at all. However the general, important caveats to this route are:
- Seven-year rule: Gifts above £3,000 per year may still be taxed if you die within seven years of making the gift.
- Genuine transfer: If you gift your home but continue to live there rent-free or receive rental income from it, HMRC may view it as a “gift with reservation of benefit” – meaning it could still be taxed as part of your estate.
There are ways to make this work, such as paying full market rent to your children if you gift your home, or gifting excess income on a regular basis. These strategies must be carefully documented and reviewed with legal and financial advice.
Care Home Fee Planning: What to Know
While most people never require residential care, it’s not something we can always control. Many assume that transferring the home to their children will prevent it from being used to fund care – but this can be risky.
If the local authority suspects that you transferred your home primarily to avoid care fees (known as a deliberate deprivation of capital), they can still treat the property as part of your finances. Worse, if your children now legally own your home, their own financial situations (such as divorce, debt, or bankruptcy) could put your property at risk.
The Safer Alternative: Using Trusts in Your Will
A more secure option is to use trusts as part of your will. You and your spouse or partner can each leave your share of the home in trust for your children, while allowing the surviving partner to continue living in the home for life. This arrangement means:
- The surviving spouse only owns half the home, reducing the financial value assessed if they later require care.
- Your children’s inheritance is protected from being affected by remarriage, care costs, or other financial complications.
Setting up a will with this type of trust requires careful planning and legal advice – but it can offer peace of mind and long-term protection for your family.
There are also other ways of using trusts to protect assets, which our legal experts can discuss with you as part of a broader asset protection consultation.
Speak to Our Castleford Wills & Probate Team
Every family’s circumstances are different, and there’s no one-size-fits-all approach when it comes to protecting your home and other assets. Whether you’re concerned about care home fees or inheritance tax, Ison Harrison’s experienced wills and probate team in Castleford can help.
Call us today on 01977 557 171 or email us at castleford@isonharrison.co.uk to arrange a free, confidential consultation to discuss your options.
