You do not mention a mother, so I presume that your father owns the house exclusively.
You also do not say whether you or any of the other children live in the house Â– this has a bearing on potential solutions.
The problem that your father faces Â– as John and Huw have said Â– is that there is a difficulty if your father gifts the house yet still remains in residence. This is the gift with reservation that John mentioned. These "gifts with reservation" are ignored by the Inland Revenue for inheritance tax purposes, so IHT would still be payable on the value of the home on your fatherÂ’s death. Furthermore if, having the home to the children, it was then sold there would be capital gains tax (CGT) payable on any gain from the date of transfer.
In addition to the above, the government introduced the Pre-Owned Assets Tax in the Finance Act 2004, which will become effective in April 2005. Under this tax, even if your father were to find some way of avoiding the "gift with reservation" rules, he would be caught by the POAT. This is chargeable at 5% of the value of the house, taxed at your fatherÂ’s marginal rate of tax. Assuming that he is a 22% tax payer, the POAT liability would be Â£3,850pa.
Turning to the issue of avoiding paying for residential care costs, you need to be aware that:
1. The local authority have very wide ranging powers to recover assets if they believe that an individual has deliberately divested themselves of property to avoid care home fees. This is often done as a clawback through the benefits system or by simply refusing to fund a care home place. The family would then have to fund the place if your father did not have sufficient savings and income of his own. The local authority also have the power to place a charge over the property which would have to be discharged on your father's death either from the sale proceeds from the house or elsewhere from his estate. His executors would have a legal obligation to discharge this debt as a priority.
2. A common justification to the local authority for gifting the home is to avoid inheritance tax (IHT), but this justification would not seem to be likely in this case since the gift would fall foul of the GROB rules.
As to the possible solutions, I agree with John that the discretionary trust is not advisable. Any transfer into a discretionary trust over the IHT nil rate band limit of (currently) Â£263,000 will be treated as a lifetime transfer and liable to an immediate tax charge of 20%.
Bearing in mind that the first Â£263,000 of an estate is not liable to inheritance tax, the amount of IHT that would actually be payable is (currently) Â£34,800. You need to make sure that any solution you adopt will not cost more than this.
Without knowing more details of your fatherÂ’s financial circumstances and health, this is about as far as I can go in giving useful advice. Bear in mind that if your father is in good health, then his statistical life expectancy is 21 years. This is relevant when you start to think of mortgages and equity release schemes, since this is potentially the period over which the interest will be payable.
As stated by John and Huw, your father needs professional independent financial advice on this. Please contact me if I can help further.
Bob Fraser MA, MBA, FSFA
Associate Director, Rensburg Investment Management