Who should read this practice note?

This practice note is for solicitors who advise clients about transferring their assets to family or friends.

What is the issue?

Clients may ask about transferring property or investments to family members, or friends, before their death, as a means of planning for future care.

Whether they wish to gift assets or offer them at significant undervalue, you must advise your client about the benefits and risks of doing so and clarify your role and responsibilities in the process.

Some clients may have received advice from non-solicitor legal advice services that included unjustified claims about gifting of assets to avoid the assets being considered for inheritance tax or care fees liability. You should consider seeking specialist advice if you feel it necessary to do so.

New clients

Before taking on a new client, you may wish to check whether they retained another solicitor or adviser on this matter before you and, if so, find out why they decided to change.

If you are concerned, you should ask your client if you can contact their previous adviser so that you can establish all the facts.

You should also satisfy yourself that your client is making the gift freely and has not been unduly influenced, especially where someone else purports to be giving instructions on behalf of the client.

If the intended donee is a person who is in a position to exert influence over the donor, this may give rise to a presumption of undue influence.

If indirect instructions are being given, you must confirm the instructions with the client, preferably in person without anyone else being present.

Paragraph 3.1 of the Code of Conduct for Solicitors says you must only act for clients on instructions from the client or someone who is properly authorised to provide instructions on their behalf.

If you have reason to suspect that the instructions do not represent your client’s wishes, you must not act until you are satisfied that they do represent their wishes.

If you believe you are dealing with a vulnerable individual, further information on how to proceed is available in the guidance on meeting the needs of vulnerable clients.

Conflict of interest

You should clarify who you will be acting for and from whom you will be receiving instructions.

You must consider any possible conflict of interest where you receive instructions from a donee (the individual receiving a gift), especially if you already act for the donor (the individual making the gift).

Paragraphs 6.1 and 6.2 of the SRA Code of Conduct for Solicitors deal with the handling of conflicts of interests.

If you are asked to act for both parties, you must make them both aware of the possible conflict of interest.

You should also:

• advise one of them to take independent advice and the risks if they fail to do so (for example, a gift could be voidable)
• explain that you may be unable to disclose all that you know to each of them

You may also be unable to give advice to one of them that conflicts with the interests of the other.

Both parties must give their informed consent to the arrangement in writing. Further information can be found in our practice note on conflict of interests.

Money laundering

There is a risk that donors seeking to transfer assets could be involved in money laundering or fraud.

Our anti-money laundering guidance for the legal sector will help you to spot warning signs and gives information on what to do if you have any concerns.

When you accept instructions from a donor, you enter into a binding contract with them and you are obliged to follow their instructions.

You must also comply with your obligations under the SRA Code of Conduct for Solicitors.

Professional negligence and file retention

To protect yourself in the event of a subsequent dispute or a professional negligence claim, you must retain evidence of the advice you give to the donor.

Your file notes and correspondence will normally be covered by legal professional privilege or the duty of confidentiality.

A court will not usually order discovery of a solicitor’s file unless there is prima facie evidence of fraud, but has done so where there are public policy considerations – see Barclays Bank plc v Eustice [1995] 1 WLR 1238.

In particular, disclosure will be ordered where there is sufficient prima facie evidence of iniquity – see Brent v Estate of Owen Kane [2014] EWHC 4564 (Ch).

It is possible that a trustee in bankruptcy, or a local authority bringing proceedings under sections 423 to 425 of the Insolvency Act 1986, or for debt recovery under section 69 of the Care Act 2014, or section 70 of the Social Services and Well-being (Wales) Act 2014, may persuade the court to override privilege.

Furthermore, if the client dies, the file may be seen by the personal representative(s).

Our practice note on file retention: trusts provides more information about file retention generally.

Establish the donor’s objectives and understanding

To enable you to provide relevant advice, you should do both of the following:

• ensure that you receive detailed instructions
• ensure that the donor understands the implications of their proposed transaction, including the irrevocability of the gift

Why the donor is considering a gift

You should ask why the donor has decided to make the gift as you may be able to suggest more effective ways of achieving the same objective.

For example, does the donor wish to ensure that a particular person inherits an asset? This objective could be achieved simply by making a will and/or it might be appropriate to consider making a form of trust to benefit the donee.

It is suggested that notes be made of the donor’s rationale for making the gift, in addition to the advice given.

Other points to consider could be:

• is the donor seeking peace of mind by making the gift? Do they believe that it provides certainty for the future or satisfies what they consider to be a moral obligation?
• will the gift affect other individuals who might have expected to eventually inherit the asset, or a share of it?
• does the donor’s will need amending as a result of the gift? If this is necessary, then revision of the will could be included within the scope of the retainer

If the intention in making the gift is to mitigate tax, you should ensure that the donor is aware of all relevant tax implications. For further information on tax implications, see paragraph 3.4 of this practice note.

If the donor is seeking relief from the worry and responsibility of owning an asset, granting a lasting power of attorney to a family member could be a better way of dealing with this issue.

If the donor wants to try to avoid the value of their assets being taken into account for means testing where they foresee the possibility of paying for long-term care, your advice must deal with the consequences of such an action, including:

• the tax implications and
• the risks in relation to a local authority claiming that the gift was a deliberate deprivation of assets

For further information on long-term care implications, see paragraph 4 of this practice note.

If the donor’s aim is to advance someone’s inheritance, with the intention that this is brought back into account through a revised will, you should advise the donor of the importance of making that revised will.

A detailed explanation of the rationale should also be made and retained with the will.

Issues involved in the donor’s decision

There may be other issues involved in the donor’s decision, for example, where:

• the donor is infirm or disabled, and an adult child or other relative has given up a paid job or the chance of career advancement to provide full-time live-in care in the expectation of inheriting the home on their death
• the donor is no longer able to pay for the upkeep or improvement of their home and their child has been funding these in the expectation of inheriting the property
• the asset was vested in the name of the donor but was funded in whole or in part by their son or daughter

In these situations, the donee could make a claim against the donor either based on proprietary estoppel, or under a constructive trust.

All such explanations and motivations should be carefully documented.

Nature and extent of the assets

You should request details from the donor regarding the nature and extent of the assets being disposed of, and whether the donor expects to receive anything in return, including:

• whether the asset is the family home, or an interest in a property or business
• whether the gift will include art, antiques, jewellery or investments
• whether the gift is a one-off or one of a series
• the extent of the gift in relation to the rest of the donor’s assets, including assets held on their behalf or in trust by others, and the impact on their standard of living
• whether they intend to make an outright gift, offering a loan or set up a trust, or acquiring a share in a business or property owned by the donee
• whether the donor expects to receive anything in return for their gift and, if so, what is the magnitude of their expectation? For example:
  • the donor might propose to give their house to a family member and in return remain there for the rest of their life. In this case, you would need to talk to the donor about the terms on which they will occupy, for example rent, insurance, and maintenance of or alterations to the property
  • the donor might expect the donee to provide care or financial assistance
  • the donor might be acquiring a share in a business or property owned by the donee
• the age, health and circumstances of the donee, including whether they are reliant on means-tested benefits or local authority-funded care, both of which could be affected by the gifted property increasing the capital of the donee
• the possibility that the donee may die before the donor, or that the donee becomes involved in divorce, civil partnership dissolution or bankruptcy proceedings
• whether they intend the gift to take effect immediately or later, for example on the donor’s death or if they go into a care home
• whether the donor has already made gifts to the donee or others

A proper assessment of the implications of making a gift of the asset both for the donor and the donee is best achieved by listing in writing the benefits and risks, and thinking about other issues such as tax and future care.

You should also tell the donor that if the gift is made outright, it will normally be irrevocable so they cannot assume that the asset would be returned to them upon request.

Once the donor has given the property to the donee, usually the property belongs to the donee and the donee is under no obligation to return it to the donor.

If the gift is not irrevocable, and/or if there is some arrangement to return the gifted asset, you should consider the tax implications and explain them to the donor.

Benefits of transferring assets

If the donor transfers assets:

• there may be savings in relation to inheritance tax and administration costs upon the death of the donor
• the donor may avoid the need to sell assets to pay for care fees
• the asset may not be taken into account if the donor has to undergo means testing for benefits or publicly funded services
• the donor may be relieved of the burden of responsibility for the asset
• it could reduce delays in processing the donor’s estate on their death

Risks in transferring assets

Among the risks are:

• the value of the assets may still be taken into account or become relevant in the context of funding long-term care, as there are anti-avoidance measures in relation to means-testing. Specialist advice may be needed if a situation such as this arises; for further information on long-term care implications, see paragraph 4 of this guidance
• if the donor subsequently needs to move into a home but does not have the resources to pay for their care themselves because of the gift, the local authority may only pay for the basic level of care, leaving the donor to rely upon the financial support of others to enable them to move into a home of their choice
• the donee may not provide the support expected, resulting in suffering for the donor – for example, by not topping up care fees, or by moving the donor prematurely into a residential care home in order to occupy or sell the family home
• the relationship between the donor and donee may change and the donor may regret the gift. Parties can and often do fall into dispute and even become quite hostile to one another
• the donee may lose their entitlement to means tested benefits and/or local authority funding for social care and support services
• if the arrangement is challenged, there could be additional legal fees

Particular considerations in relation to a gift of the donor’s home

In addition to the risks noted above, there are particular issues created by a gift of the family home, especially if the donor intends to remain living in the home. For example:

• a donee may die first or become involved in divorce, civil partnership dissolution or bankruptcy proceedings. If this occurs when the donor is still living in the gifted home, the donor may be made homeless
• if the donor transfers their home, they may be deprived of opportunities to adapt to changing circumstances – for example by downsizing, or releasing equity to pay for adaptations or care at home, so the donor may be left with no option but to move into a care home
• the donee may later decide to sell the gifted home, and will be under no obligation to consult the donor

Many of these problems can be overcome by the creation of a trust, instead of an outright gift, and donors should be advised accordingly.

There are also specific tax considerations on a gift of the donor’s home – see below – and on creating a trust.

Tax implications

A solicitor could be held to be negligent for incorrect tax advice. The main considerations are as follows.

Capital gains tax

A gift is a disposal for capital gains tax purposes.

Unless there is a valid exemption (such as principal private residence relief) or holdover relief is available (for certain business assets, for example), the gift can trigger an immediate capital gains tax liability for the donor if the asset stands at a gain.

If the asset being given away is the family home, the principal private residence relief exemption will not be available for the donee on future disposals, unless the donee lives in the property as their main residence.

There will be no automatic uplift in the value of assets given away to the market value on the donor’s death.

Inheritance tax

There may be (by virtue of the “gift with reservation of benefit” (GWR) anti-avoidance rules) no inheritance tax saving if the donor receives a benefit from the asset – for example, if they continue to live in the home after transferring it to a child.

There may be an inheritance tax liability if the donor dies within seven years of making the gift to an individual; beneficiaries of an estate may then be burdened with a larger than expected tax bill upon the donor’s death.

The donee’s estate will be increased by the gifted property and this may lead to an inheritance tax liability on the death of the donee.

If the donor has gifted the family home, they may be unable to use the residence nil rate band.

Gifts of relieved property – such as certain business or agricultural assets – will need specific consideration.

If the gift is not to an individual outright, there is the possibility of an immediate charge and further consideration of the inheritance tax position would be required accordingly.

Stamp duty land tax, land transaction tax and other costs of transfer

Transfers of freehold or leasehold property may require payment of stamp duty land tax (in England) or land transaction tax (in Wales).

This would need to be calculated on the value of any consideration given by the recipient individual, including any acceptance of mortgage debt secured on the property.

In addition, the other usual costs of transferring property will be incurred, such as Land Registry fees and any leasehold administrative charges.

Pre-owned assets tax

Under the pre-owned assets rules, the donor may be subject to an income tax charge after the transfer.

In broad terms, these rules can apply where the donor benefits from the asset after the gift but the GWR rules do not apply.

If you choose not to advise on tax issues, you should advise the client to obtain tax advice from an appropriate adviser, and ensure that your engagement letter specifically states that no tax advice is being given.

Other consequences

If a gift is to be held on trust, then all trust tax and registration requirements would need to be met.

As well as the more practical issues, you should ask the donor to think about their general approach to their future once they have transferred assets including:

• what effect the gift could have on their future standard of living?
• what effect would transferring an asset have on others who might have expected to inherit a share of it?
• what might happen if relations between the donor and the donee deteriorate?
• if the home or other asset is a part of a family business, would the business still be viable if the asset were not included? For instance, a farm might not be able to function without the farmhouse

Local authority care provision

Local authorities are not allowed to take responsibility for a person who is the responsibility of the NHS.

Local authorities must assess the care and support needs of individuals and meet their eligible needs where they are legally required to do so.

If the local authority determines that the person has care and support needs, it is likely that a financial means test will be carried out. The rules differ between England and Wales.

In England, see the Care Act 2014, the care and support statutory guidance and the range of supporting regulations. Further information is also available on the Department of Health website.

In Wales, see the Social Services and Well-being (Wales) Act 2014, which is also supplemented by regulations, codes of practice and statutory guidance. Further information is available on the Welsh government website.

Paying for care

If the individual in need of care can afford to pay for a place in a care home, they can arrange this independently, though they should still have a needs assessment to consider all their care and support options.

They should also consider whether and how much financial assistance would be available from their local authority.

Those who cannot afford to pay for a place in a care home privately will have to approach the local authority to have a needs assessment.

Local authorities will also apply a means test to assess their ability to pay towards the cost of care, but the assessment of need for care and support should not depend on the need for funding.

However, some care homes do not provide accommodation for local authority-funded residents.

If the individual wishes to move to a care home which is more expensive than the local authority is willing to pay on the basis of their assessed needs, and the local authority can show that there are suitable homes with vacancies in the local area, the cost difference may be topped up by a third party such as a family member.

Needs assessments should be reviewed annually, though reassessments can be requested at any time.

When the value of the home is disregarded in the local authority means test

When a person moves into residential care the value of their home is usually counted as part of their capital for the means test.

However, in certain circumstances the value of the home (or their interest in it) will be disregarded.

The value of the resident’s home is disregarded in the following circumstances:

• during a temporary stay, or
• if it is occupied by a spouse, civil partner, or person living with the resident as a spouse or civil partner, or a relative who is aged sixty or over or is incapacitated, or
• if it is occupied by someone else and the local authority exercises its discretion to disregard the property, or
• for the first 12 weeks of a permanent stay in a care home

Deferred payment agreements

If the value of the home is not disregarded, a donor may wish to consider entering into deferred payment agreement with the local authority.

Under these agreements, the local authority will take a charge over the donor’s home, which will not be sold to pay for the costs of care until sometime in the future, usually on the death of the donor.

The local authority will charge interest on the debt which accrues and add administrative costs.

A deferred payment agreement may protect someone living in the donor’s home, but usually only until the death of the donor.

Deprivation of capital

Given the limitations of the disregards and of deferred payment agreements, clients may wish to transfer property to avoid the property being counted in the local authority means test.

In such circumstances the local authority may treat the donor as having intentionally deprived themselves of capital.

In most cases, the intention behind making gifts of assets is the most important factor.

If a local authority believes that an asset has been given away with the intention of creating or increasing entitlement to means tested local authority financial support, it may decide that the donor has notional capital of equivalent value to that of the asset given away.

Your client will be particularly vulnerable if they are deemed to have notional capital as, although the local authority is obliged to provide care, this does not have to be in a care home.

Alternatively, even if a care home place is arranged, your client may not be entitled to financial assistance towards the fees due to the notional capital.

Although the local authority may still be obliged to ensure that care and support is provided, the local authority could seek payment using debt recovery methods, as in the case of Robertson v Fife [2002] UKHL 35.

The local authority could impose a charge on the asset after it has been gifted or even recover the asset. The local authority may also seek recovery of its additional costs from donees.

For a local authority to pursue a claim, it would have to show what the donor’s intention was at the time of disposal. It may be difficult for the donor or donee to give evidence as to the donor’s intentions.

If another purpose of the gift cannot be established or indicated, a judge may conclude that the donor’s intention must have been to avoid paying for the cost of care. This is a further reason why it is important to establish and document the donor’s motives in making the gift.

Deprivation of income

Local authorities may also look at deprivation of income, for example when a person is entitled to a personal pension but delays claiming it.

Not claiming may be a deprivation of income. The reason that the claimant has not claimed will be considered by the local authority.

If they decide that the purpose was to reduce the amount of financially assessable income that would otherwise be taken into account in the means test, the local authority can treat the person as still being in possession of that income.

Local authority recovery procedures

Local authorities can take steps to recover contributions towards care charges, and their assessment of ability to pay may take into account property that has been given away for the purpose of avoiding means testing.

Local authorities may seek recovery of care fees as a debt action under section 69 of the Care Act 2014 or section 70 of the Social Services and Well-being (Wales) Act 2014.

If the debt for unpaid contributions reaches £5,000, the local authority could start insolvency proceedings to declare the donor bankrupt.

Local authorities in England cannot impose a charge on a property unless it is a deferred payment agreement.

Welsh local authorities can impose a unilateral charge over the person’s interest in land (whether in England or Wales) under section 71 of the Social Services and Well-being (Wales) Act 2014.

A gift may be set aside without time limit and without bankruptcy if the court is satisfied that the transfer was made for the purpose of putting assets beyond the reach of a potential creditor or otherwise prejudicing the creditor’s interests. See sections 423 to 425, Insolvency Act 1986.

Additionally, and significantly, the donee could be held liable for the difference between the amount the local authority would have charged the donor were it not for the transfer of the asset and the amount the local authority did in fact charge the donor (section 70, Care Act 2014; section 72, Social Services and Well-being (Wales) Act 2014).

The donee’s liability will not exceed the benefit they have received from the transfer.

National Health Service-funded care

You may wish to consider the provision of free lifetime care by the NHS (called NHS Continuing Healthcare) when a donor is initially considering a gift of assets.

Where someone’s needs are primarily for healthcare, the full cost of care (including the cost of accommodation) should be the responsibility of the NHS.

However, not all persons in need of healthcare will be eligible for NHS Continuing Healthcare, and their care and support needs will be the responsibility of the local authority.

Further information can be found on the NHS website.

The NHS Continuing Healthcare system in Wales is different to that of the one in England; specific advice should be sought if dealing with the Welsh system.

Further information can also be found on the Welsh government website.

Registered nursing care in care homes

An individual may receive financial support for healthcare, even if they are not eligible for NHS Continuing Healthcare, if they live in a care home registered for nursing care, and receive registered nursing care from a registered nurse.

This includes any service provided by a registered nurse which involves the provision of care, or the planning, supervision or delegation of the provision of care, other than services which, having regard to their nature and the circumstances in which they are provided, do not need to be provided by a registered nurse.

Nursing home residents in both England and Wales are eligible for a contribution from the NHS of a flat rate towards their care fees.

Validity

You should ensure you comply with any formality requirements for the transfer of legal title in the asset(s) to be gifted, for example: registration requirements for land and shares.

If there is to be a transfer of beneficial title only (whether in advance of a transfer of legal title or instead), the drafting/arrangements will need to satisfy the certainty requirements for the creation of a bare trust.

For example, making clear there is an intention to create a bare trust and adequately defining the asset (which may need to be specifically set aside in advance).

Joint donors

Where the donors are seeking to make a joint gift, you should consider the position of each donor separately.

Where the donors may have children or dependants from previous relationships, you should consider their obligations to those children or dependants.

You must also make the donors aware of any potential conflict of interest between the two of them in terms of your advice.

You must establish whether both donors have capacity to make the gift and whether either donor is exerting undue influence on the other.

It may be necessary to meet each donor individually, and you should consider whether separate legal advice is needed, to protect the interests of each.

Where the gift to a third party is the home in which the couple are living, there will be the same risks as with individuals providing the gift.

However, if the gift is of a share in the home by one of the donors to a third party, you should fully explore the implications for the potential survivor.

It is common for spouses, civil partners or cohabitees to contemplate a gift of their home to avoid its value being taken into account in relation to means testing for care home fees.

In addition to the general advice about deprivation of assets, you should advise the donors that if only one of them goes into care, there are circumstances in which the value of the share of that donor will not be taken into account, where the other donor remains in the home. See ‘paying for care’ (paragraph 4.1) above.

Consideration should also be given to access to any files relating to the gift in the event of a divorce or other breakdown in the relationship between joint donors.

You should advise the donors that the files are jointly owned and the original cannot be given to one party without the other’s consent, although both parties are entitled to a copy of the file at their own expense.

Establish the nature of the donors’ relationship

You should ascertain the relationship of the donors, as different considerations apply for marriage, civil partnership, cohabitation or living together on a non-sexual basis.

For married couples and civil partners, you should make the individuals aware that they benefit from the inheritance tax exemption on the transfer of assets between them, both on death and during their lifetime.

Therefore a gift of an asset to a third party during their lifetime may not result in any tax saving on the death of one of the couple.

Following the dearth of the first couple, the survivor’s expenses may increase due to living alone at the same time that income is reduced because of lost pensions.

Therefore to ensure that the survivor is left with sufficient assets following the first death, it may be preferable to retain assets, either absolutely or in an interest in possession trust until the death of the survivor.

The survivor’s estate may then benefit from the transferable nil rate band and residence nil rate band if applicable.

For cohabitees, there is no inheritance tax exemption on gifts between them so a lifetime gift to a third party may appear to have a tax-saving advantage.

However, you should explore the implications for the survivor.

As with a married couple, the survivor may well have increased living expenses or have a fall in income following the first death.

It might still be better to choose a testamentary gift of the nil rate band to a discretionary trust of which the surviving cohabitant is a beneficiary.

There is an automatic presumption of undue influence when certain relationships exist between the donor and donee (for example, where the donor is a child and donee a parent) and the transaction calls for explanation.

A gift of property with significant value will often call for explanation. If this presumption of undue influence is raised, it will necessitate separate advice for the donor(s) and the donee as a means of rebutting it.

You should also establish whether the donor(s) have taken into account the needs and expectations of each other and any other children.

The consequences of the death of the donee before either or both, of the donor(s) needs to be considered both from the point of view of tax liability (inheritance tax and capital gains tax) and of succession to the property.

Multiple donees

Often, the gift will be to more than one donee, such as to several children, including where joint donors have children from different relationships.

Clients should be made aware that a gift to multiple donees could increase the potential for complications.

The higher the number of donees, the greater the chance of a problem arising in the future, such as one of the donees facing divorce, financial hardship, bankruptcy or incapacity.

There is also the possibility that in the future the donees may disagree about issues concerning the donor(s) and the assets.

It is unlikely to be appropriate for one person to act for both the donor(s) and all the donees.

Each party is likely to need separate legal representation to ensure their particular interests are considered.

Self-settled life interest trusts

The donor may have been given the idea of a self-settled life interest trust.

They may be under the impression that a donor is still able to use the asset but that the value is not taken into account by a local authority on means testing.

However, there may be an immediate inheritance tax liability on setting up a trust (other than in a narrow range of circumstances, for example: the donor has a disability or is likely to become disabled, or depending on the value settled).

In addition, there is the need to consider whether the disposal gives rise to a capital gains tax liability (and if holdover relief can apply).

It may also be the case that a local authority would look through the trust and include the relevant assets in any means-testing calculations.

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