My father is thinking of putting my name on the deeds to his house, following the death of my mother.
He would continue to live there and pay all of the household bills. We thought this would be a good idea as the difference between what my parents paid for the house in 1997 and now is considerable.
What kind of tax could we be liable for should anything happen to my father? Are there any pitfalls to this?
It is quite easy to put the deeds of your father’s house into your name. However, there are a number of potential pitfalls.
You mention that his house value has risen considerably since he bought it. As this has been his principal primary residence, there will be no capital gains tax to pay if he sells the property. However, if the property is transferred to you, and it is not your principal primary residence, then you may face a capital gains tax bill in the future on any rise in value after you became the owner.
If you’re worried about a future inheritance tax (IHT) bill, you should analyse this in detail. Your father’s estate should be entitled to a nil-rate band, currently £325,000, plus any of your mother’s unused nil-rate band and, if he passes property to a direct descendant such as yourself, he can also benefit from the residence nil-rate band, which is currently £125,000, rising to £175,000 over the next two tax years.
From an IHT perspective if he gifts the property to you, this will be treated as a potentially exempt transfer (PET). What this means is that if he lives for another seven years the property will be deemed to be outside his estate. If he dies within seven years, then it will still be taken into account when looking at his inheritance tax position.
However, if he gifts the property to you and lives there without paying you a fair value market rent, this will be deemed to be a gift with reservation, where he has given you a gift but he is still benefiting from it. If this happens, the property will still be considered to be in his estate for IHT purposes. To avoid this, he needs to pay you a fair value rent. You will then be liable for income tax on the rent you receive.
There are risks for your father – if you fall out, you could evict him
You should also be aware that if your father requires social care in the future, your local authority may deem that he has passed the property to you to avoid it being included in a calculation of his assets. This is called deliberate deprivation and is more likely to be the case if your father needs care within a few years of passing the property to you.
There are a number of other potential risks for your father. If you fall out with him, you could potentially evict him. If you’re made bankrupt, the property would be considered as one of your assets. And if you get divorced, your ex-partner could make a claim on the property.
Also, you’ll need to consider what happens if your father outlives you. Will you bequeath the property back to your father? If you leave it to somebody else, this could leave him in a vulnerable position. Also, the property would be part of your estate for IHT purposes, meaning your father could end up with a tax bill.
There are many potential complications and you really should take independent financial advice before doing this.