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In UK news recently, there has been much talk about so called 'dementia tax', that is, the government using assets (such as property) to pay for social care in old age.

Whether or not people should have to pay for this care (given that they've previously paid taxes etc) is debatable and probably not a discussion to be had here as it's primarily opinion based.

My question is whether it is permissible for parents to 'gift' houses to their children before reaching old age to avoid the family home being taken.

As I understand it, there is a limit on the value of gifts that may be passed on without taxation, but what I don't understand is what stops parents selling their home to their children for some nominal fee, say £1. Whilst I can imagine the government wanting to stop this kind of practice, I'm not sure how they would intervene, every day houses sell for above and below what they're truly worth!

Ethics aside, is there any legitimate reason why this is unlawful, and if not, are there other means the government can use to recoup this money (it has been suggested to me, anecdotally, that it's fine so long as it takes place x years before the death of the person originally owning the home).

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    "... what stops parents selling their home to their children for some nominal fee, say £1." - Where I live (The Netherlands), the tax bureau isn't stupid enough to fall for that. They will determine the nominal value of the house, subtract the paid £1, and you'll be due taxes over the rest. Plus you'll be on the hook for tax fraud. I highly suspect the situation to be similar in most western countries, including the UK.
    – marcelm
    Jun 5, 2017 at 12:48
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    What @marcelm wrote is true for Italy as well, with the added twist that the tax agency sometimes invent their own supposed value even if you sold for market prices, without ever seeing the property but usually just doubling the amount and calling you a fraudster.
    – Andrea Lazzarotto
    Jun 5, 2017 at 12:50
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    It you give your house to your children they could kick you out (if your relationship is bad) and leave you homeless, or they could get divorced and loose half the house to their ex, or they coudl become bankrupt and loose the house. Just things to consider
    – mattumotu
    Jun 5, 2017 at 15:57
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    It's not correct that "there's a limit to how much you can transfer without taxation". You can transfer as much as you like in the UK without Inheritance Taxation - as long as you live 7 years after the transfer. Your question also conflates "dementia tax" with Inheritance Tax - they are two very different things with different rules, limits, caps, rates and constraints.
    – Mark Setchell
    Jun 5, 2017 at 16:18
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    Your offspring marries and then dies. Your in-law then remarries, and then they die. Suddenly your house is owned by someone you don't even know.
    – Strawberry
    Jun 6, 2017 at 12:41

4 Answers 4

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If you sold your house to your children for a nominal sum then you'd have to pay rent to the new owner in order to continue to live in that house. The rent would need to be a market rent. Doing otherwise is called a "gift with the reservation of benefit" which means it's still treated as part of your estate when you die or go into care. The new owners would also be liable to pay tax on this rental income.

You'll also need to live for at least 7 years after the transfer.

There have been court cases where people have made gifts (not just houses) and councils have challenged the legitimacy of these gifts. Basically if the gift is primarily to avoid taxation it is called “deliberate deprivation of assets” and could be treated as if it did not occur.

That means giving gifts after you become ill is treated differently to gifts given if you are not ill and have no particular expectation that you will become ill in the future.

The size and type of gift is also significant, a wedding present to a child would be different to a random gift for no particular purpose for instance.

There's more information about property transfer and avoiding care home fees here, although there are plenty of other resources if you search for them.

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    Though the first link did mention that the whole rent thing doesn't apply if the new owners live there as well
    – fyrepenguin
    Jun 5, 2017 at 4:36
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    Is a physical body required to occupy the premises in order to be considered "living there", or can the child just set it as their primary address and be done?
    – Anoplexian
    Jun 5, 2017 at 15:07
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I work for a firm of Chartered Financial Planners, but I am not one myself and this is not Financial Advice. Do your own research and get Financial Advice from someone qualified to give it.

What you're looking for is a Potentially Exempt Transfer or PET.

PETs work like this:

  1. You give away some part of your estate (in this case your house) and receive no further benefit from it.
  2. You wait 2 years.
  3. For every year after that, 20% of the value of the gift is considered no longer part of your estate.
  4. After 7 years, the entire gift is no longer part of your estate and isn't part of Inheritance Tax calculations.

So if a parent gives a house to their children and lives for another 7 years, there is no way (under current law) for the government to recoup it upon the parent's death.

Rules & Exceptions:

When it says give away your house, it really does mean give it. Your children can't let you live there rent free, or with subsidised rent, or with any other kind of explicit benefit. If the government decides that you are somehow receiving a benefit from a gift, this is called "gifts with reservation of benefit" and does not count.

If you are means-tested in the meantime (say for Local Government Social Care), the government might challenge the gift as "Deliberate Deprivation of Assets". The longer between the gift and when this happens, the less likely you are to have a problem.

Where I work, we generally advise parents to give away the house to their children, and then rent it from them at market rates. (If the market rate is difficult to determine, try to figure out what local properties charge as a % of what they're worth, and go with that percentage. Or just ask an Estate Agent).

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  • Good answer, except that 6% is probably too high. There are very few parts of the UK that have rental yields that high and in many areas it is substantially lower.
    – JBentley
    Jun 5, 2017 at 20:47
  • In areas of the country which it is expensive to live - for example, central Cambridge (postcode CB1) - it is between 3.0% and 4.0%. The house I live in is between 3.6 and 4.5%, on the outskirts of Cambridge. In cheaper areas it does get closer to 6% - in Liverpool (L15) it's around 6.3%, but that's for a property worth 161k, when the UK average is 300k.
    – Tim
    Jun 5, 2017 at 23:18
  • Could the parent sell the child the property for the estimated value of rent for their remaining years (i.e. if the parent is 75 they should sell it for 6%*8 = 48% of market value) and then all the money would have been paid to the child when they die?
    – Tim
    Jun 5, 2017 at 23:22
  • @Tim In short, no. And in long, If you sell it to your kids for money, the money they pay you is still part of your estate and liable to be taxed. Having a £1M house or £1M in cash doesn't make a difference when it comes to taxing your estate.
    – Kaz
    Jun 5, 2017 at 23:41
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    @Tim Sure, but to what benefit? You sell it at market value, and transfer back 5% a year in rent. Or you give it away, and transfer 20% a year so long as you live 2 years first. Unless you're going to die in the next 2 years, the second option beats the first by a mile.
    – Kaz
    Jun 5, 2017 at 23:47
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Also, selling an asset at a price far below market value can have unintended consequences (at least in the US). In the case of a residential property, it might make sense to sell it at fair market value, and pay rent to the new owners such that it covered the mortgage on the property that they would have taken out to pay for it.

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  • Given the context, there's an implication that the parents already own their property with no mortgage, so selling it and then renting would offer no benefits.
    – Steve Melnikoff
    Jun 5, 2017 at 8:38
  • @SteveMelnikoff - the author of this answer is assuming that the child would have to take a mortgage to buy the house at fair market value, and that the parents pay rent to cover the child's new mortgage.
    – NL - Apologize to Monica
    Jun 5, 2017 at 14:13
  • @NathanL: OK - but in that case, this is a very bad idea! If the intention is for the children to ultimately own the property with no mortgage and having paid minimal tax and fees: the former will only be true at the end of the mortgage, which could be a long way in the future (depending on how fast they're paying it off); but more significantly, changes in UK taxes in the last few years mean that there is extra stamp duty to pay on the purchase of rental properties, and an effective increase in income tax on mortgaged rental properties...
    – Steve Melnikoff
    Jun 6, 2017 at 8:09
  • ... - plus of course, there will be interest to pay on the mortgage. All in all, selling the property to the children and renting it back would lead to a lot of extra costs, and so would not (IMHO) be worth it.
    – Steve Melnikoff
    Jun 6, 2017 at 8:10
  • @SteveMelnikoff some people in the US answer questions based on the realities of US law that don't apply elsewhere in the world. I wasn't suggesting that the answer applies well in the UK. In that context, the author of this answer has no idea about the implications of any of what you clarified in your follow-up comments. I would probably suggest that this answer be removed completely, Mr. Pierce would have no idea why from your first comment.
    – NL - Apologize to Monica
    Jun 6, 2017 at 11:08
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what stops parents selling their home to their children for some nominal fee, say £1

arm's length

I personally don't mind the down votes, because I'm not an expert myself, but I've asked this question to people who know a lot about taxes, and they summed it up as "arm's length". You might think that you can sell your house for £1 and that's what it's worth because that's what someone paid for it, but tax-wise, you can still be responsible for paying taxes at the rate that someone else would have paid for the house.

Anyways, if you don't believe me, get some professional advice before you sell your house to a relative for £1.

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    Just to add to this.. We bought my parents house from them for half it's market value. This was called a sale at arms length and we only paid stamp duty on the price we paid, not the market value. We do however have sole occupancy of the house with parents elsewhere. So although I'm not sure about a £1 sale..a dramatically reduce price is allowed as long as the parents move out.
    – Bex
    Jun 5, 2017 at 12:13
  • I think the down votes are because link-only answers tend to become useless over time as the links stop working. Even when you updated your answer you didn't explain the term.
    – Johnny
    Jun 6, 2017 at 4:42
  • @Johnny fair enough, although I don't really know enough about taxes to give a good answer. The more of my own words I use here, the more likely there is to be wrong information. I know that this will be part of the correct answer though, and I was hoping someone else on the site who was more knowledgeable on the subject would be able to run with it and provide a better answer.
    – martin
    Jun 6, 2017 at 5:04

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