Recently, it was reported that an elderly mother, Norma Gibbons, has been evicted by her own daughter, Dawn Gibbons, from her £1.4m London flat following an irretrievable breakdown in their relationship (see MailOnline, 5 July 2023).
Strikingly, the eviction was made possible due to the mother having gifted her flat to her daughter previously, for “inheritance tax reasons“.
Although there is clearly much more to this rather complicated case than meets the eye, it nonetheless serves as a cautionary tale for those tempted by the idea of gifting their property to a relative in order to mitigate against inheritance tax.
If a homeowner (the ‘donor’) decides to make a gift of their home, they are potentially exposing themselves to the risk (as Norma found out) of being evicted from their own home in the event that their relationship with their child or family member (now the homeowner) (the ‘donee’) were to break down. Similarly, in the event that the donee‘s marriage were to break down, for example, the property could potentially be involved in the divorce settlement, thus making the donor homeless. In a further example, if the donee were declared bankrupt, or find themselves in some other form of financial difficulty, then this too could result in the donor being made homeless.
There are also inheritance tax anti-avoidance provisions, known as the “gift with reservation of benefit“ rules, which provide that, in the event that a person gifts their property yet continues to live in it (and therefore derives a benefit from it), it cannot pass outside of their estate, even if they survive by seven years after having made the gift (which is the time period otherwise relevant to gifts not involving a reservation of benefit). In such a scenario, there would not be any inheritance tax saving to be had on the donor’s death, even if they successfully avoided falling foul of the various risks set out above.
The picture is somewhat different in the event that a homeowner decides to transfer a second home or holiday home to a child or other family member, but this should still be approached with caution (for example, if the donor were ever to stay at the property in future, they would need to show that they were paying commercial rent to do so). The donor would need to survive for seven years following the date of the gift for it to fully pass outside of their estate, and capital gains tax could also be payable on the difference between the acquisition cost of the property and its value as at the date of gift (assuming the property were not gifted into a trust, as if it were then holdover relief could apply).
If further advice is needed, then Ellisons’ Private Client team would be happy to assist further.