Cash Clinic: Can liferent be a way of saving on future residential care costs?

Q MY PARENTS (both in their eighties) have their own home and are now considering transferring their home to the family – my brother, sister and me. This is mainly so they can prevent the property being used for any future care costs and for them to receive liferent.

What is the best way to proceed with such a process and are their particular issues for consideration?

DR Edinburgh

A There are a number of ways of proceeding, all of which require a solicitor. The simplest method would be a declaration of trust, but this would lack transparency, so I would not recommend this route. That leaves two other options.

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First, the title to the house can be transferred as a gift into the joint names of you, your brother and your sister "in fee", meaning that it would be subject to the liferent, which should be retained by your parents. You would all then be title holders of the property for your respective interests. On the death of one parent, the liferent could transfer to the surviving parent. On the death of both your parents, the property would then belong to the three of you outright, without any further formality.

More flexibility can be achieved with the second possibility, which is that your parents set up a liferent trust, which appoints trustees and sets out the entitlements of each of you. The house could then be conveyed as a gift to the trust. The deed of trust could provide for the liferent to be terminated at any time, at the discretion of the trustees. This could be useful if your parents go into hospital or residential care permanently. After a death, the deed could provide for the survivor to continue as the sole liferenter. The trustees could comprise family members, but there is merit in also having a professional trustee to safeguard the respective interests of the beneficiaries.

On the death of both of your parents, the title would remain with the trustees, who could then sell the property and pay the proceeds to you, your brother and sister as the ultimate beneficiaries.

Legal and tax advice is essential before proceeding with this, especially for your parents. If the value of the property transferred by either of your parents exceeded 325,000, inheritance tax (IHT) would be immediately payable at 20 per cent on the excess. You would also need to take account of any gifts made in the previous seven years, because of possible IHT consequences. If these thresholds are likely to be exceeded, then your parents could consider restricting the share of the house which is transferred.

No capital gains tax would arise, provided your parents have been living and continue to live in the house throughout, with immediate sale following thereafter. Stamp duty land tax would also be avoided as this is a genuine gift.

Finally, it is worth reiterating that this strategy will not necessarily avoid assessment for residential care fees. There is no absolute time limit which puts the gift beyond assessment, and it is up to each local authority as to how robustly they deal with such cases.

• Dale Ross is a senior associate within the private client and financial services department of HBJ Gateley Wareing.

• If you have a question you need answered, write to Jeff Salway, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected].

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• This above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley Wareing accept no liability on the basis of this article.

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