Sharing Property with the Elderly
Sharing Property with the Elderly
Sharing a property with an elderly relative may seem to be the perfect answer to rising property prices, and concerns over care for the elderly, but people contemplating such an arrangement should be aware of the legal and practical problems which may arise. There are a number of different ways to share property, but an equal number of pitfalls, whether legal, financial or relating to tax.
Some preliminary considerations
Whatever arrangement is under consideration it is important for there to be frank discussions beforehand about how the relationship will work. Issues which need to be covered include:
- How will bills be paid – by whom and in what proportions?
- What facilities will be provided – are there any “rules” about use of rooms?
- What level of support will be provided to the elderly person – for example, companionship; preparation of meals; laundry; shopping
- When will the relationship come to an end, for example, due to the increasing needs of elderly person or a breakdown in the personal relationship?
- If there are to be financial consequences, either during the elderly person’s lifetime, or on death, then these need to be discussed with other family members, particularly those who may be expecting to inherit
Options for sharing property
Some of the more common options for sharing property are:
1. The Elderly Person Moving in with Relatives
In many ways, this is the simplest solution. Although no legal documentation is necessary, it may be helpful to draw up a licence recording some of the issues referred to above, particularly covering the circumstances in which the elderly person is to move out. The position may be complicated if the elderly person originally owned the house and gifted it to the relatives now living there, or if a capital contribution is made e.g. to pay off the mortgage. Professional advice should be sought in such circumstances.
2. Building a “Granny flat”
Extending an existing property to build a “granny flat” is more complicated both in terms of the planning and building regulation consent which is likely to be required, and the financing of the extension. If the elderly person contributes towards the cost, then is this a loan, or gift, or is the elderly person to have ownership of part of the property?
If the older person gains an interest in the property, then what will happen if the property has to be sold, e.g. in the event of financial problems or divorce? There may also be an issue if the elderly person needs to move into a care home, and the local authority carries out a financial assessment. For all these reasons it is important that appropriate legal documentation is drawn up to reflect the nature of the financing.
Different inheritance tax (IHT) consequences flow depending on the nature of the financial contribution. If the elderly person has a share in the property then it will form part of their estate on death; and this may also be the case if the money is a gift (if the gift with reservation of benefit rules are deemed to apply).
3. Moving into the Elderly Person’s house
Younger people may decide to move into an elderly relative’s house on the understanding that they will provide certain care services, in return for a share in the property, either immediately or on death. Whatever arrangement is reached should be documented properly, in order to ensure that it is enforceable and to avoid adverse tax consequences. It is advisable that other family members are involved in discussions and are happy with what is proposed. Some of the potential problems are:
- A gift by the older person will still be subject to IHT until they have survived 7 years since the date of the gift
- If an older person moves into a care home shortly after making the gift, then the local authority may seek to claw it back to form part of the estate
- A “promise” to leave property to someone after death which is not reflected in a will may be enforceable – but it gives rise to complicated legal and factual arguments
4. Joint Purchase of Property
Sometimes both parties may decide to sell their properties and buy a new home in which they can all live, thus saving the costs of running two households and enabling some element of care and support to be provided to the older party. In these cases, it is important to identify who will own the property i.e. whether the older person is making a gift or loan of the money, or whether all contributing parties will be co-owners.
As mentioned previously if the money is intended as a gift it will be exempt from inheritance tax provided the donor lives for 7 years. If the money is a loan, then it remains part of the older person’s estate for IHT purposes. If the parties are to be co-owners, then a declaration of trust needs to be drawn up recording their percentage interests in the property.
It is particularly important in these circumstances to document what will happen if any of the family relationships involved break down.
How we can help
We can advise on the drafting of loan documents, licences or declarations of trust necessary to record the parties’ intentions, and on the tax consequences of what is involved, as well as the impact on any assessments which the local authority may carry out.