A combination of rising house prices hampering first time buyers plus the threat or fear of care home fees has seen many parents transfer their main residence to their children or contemplating the act. Prima facie, this may seem a great IHT strategy as the parents transfer ownership to the children. Some parents view this as a great way to have live in care from their own blood.

However, such decisions may not be so good as first thought. The transfer to the child(ren) may be fine. However, here comes the red flag. If the parent(s) continues to live in the property following the transfer of ownership, the gift fails. The gift is caught by what is known as ‘gift with reservation of benefit (GWROB).’

A GWROB arises where an individual transfers ownership of an asset to a beneficiary, but the transferor continues to benefit from it following the transfer. A parent transferring their home to their children but continuing to live in the property is a perfect example of a GWROB.

In effect the property will be deemed to still be a part of the estate of the parent(s) for IHT purposes and moreover for any assessment or contribution to residential care home fees in the future. However, there is greater problem arising from the benevolent and innocent act by a parent that needs to be addressed before any attempt to resolving the GWROB.

A parent’s transfer of their property to their child, means that the child is now the legal owner and not their parent. Suddenly, the parent has moved from secured residency to being at risk of losing their home. This may arise in three simple steps.

Firstly, the child can evict their parent if they desire. To some this may seem far-fetched. However, it is a reality in 2022, that some children have forced their parents out of their home sometime after the property transfer has been completed. Some local authorities are battling with this emerging group of homeless people. It is for this reason alone and not any great tax planning strategy that parents should be reluctant and not in a hurry to transfer their property to their children during their lifetime.

Secondly, what happens if the child becomes divorced? The spouse of the child would have a legitimate claim against the child’s estate; and that includes the house that has been transferred from their benevolent parent(s). Thirdly, if the child becomes bankrupt, the property will be included as part of the child’s assets.

What began as a wonderful parental gesture is no longer so attractive? As parents have through their own action often without professional advice, placed themself at risk of losing their home. This is in addition to the creation of a GWROB. In the past three years HMRC was recovered over £370m from such gifts which have failed. The underlying problem is not the transfer of the property by the parent but the transfer of the property without seeking any professional advice. The professional fees saved is often paid to HMRC a multiple of times.

A simple solution to the GWROB problem is for parents not to transfer their main residence to anybody during their lifetime. However, if they wish to transfer the property, a GWROB can be avoided if the parent pays market rent to the child after the transfer of the property. Market rent must be payable for life by the parent.

In addition, any such transfer may not be a sanctuary from care fees. Local authorities may regard the transfer as a “deliberate deprivation of assets” by the parent(s). If this is the case, the local authority will take action to recover care fees.

Parents should always seek professional advice before any property gift; otherwise,  their gift can easily become a GWROB.