The number of adult children living at home with their parents has risen significantly in the last ten years. According to figures from the 2021 census, there are 4.9 million “non-dependant adult children” living at home, which represents a 15% increase.
For many, perhaps most, this is a financial decision. As house prices and rents have soared, continuing to live with your parents, or moving back with them after university or a period of renting, may be the best or only way to save for a deposit to buy.
There are other reasons for living at home, of course – for example, in some cultures it is more common to continue to live with your parents until you marry, and even sometimes afterwards as a couple. Some adult children may be carers for their parents, and others are simply happy living at home, get on well with their parents and see no reason to move.
There are advantages for the parents too. If your children don't move out, you never face the "empty nest" syndrome, are hopefully less likely to be lonely, and perhaps have additional income and help with household tasks.
Whatever the original reason for this arrangement, parents and children are bound to have questions concerning what will happen to the family home in the future. Here are some of the most common issues parents are likely to think about in this situation:
What will happen to my house if I go to a care home?
As parents get older, they may worry about what will happen if they need to move into a care home. Will their house have to be sold to fund such a move, and what will their children's position be if that is still their home? Parents may consider giving their child a share of the house to protect them from having to sell it in such a situation. However, it is essential to understand if a local authority will pay for care or may require the value of a parent's house to be included in the assessment of their means to pay care home costs.
Will my children have to pay inheritance tax?
If parents give their child a share in the family home in which that child also lives, this will be a potentially exempt transfer for inheritance tax (IHT) purposes. In this situation, if parents survive for seven years after making the transfer, the share of the property given to the child or children will pass free of IHT.
Such a gift would not be beneficial for IHT purposes if only the parents continued to live there. In that situation, for tax purposes, anti-avoidance rules for 'gifts with reservation of benefit' (GROBs) would treat the property given away as if it continued to belong to the parents and it would consequently be taxed as part of their estates on death.
The GROB rules do not apply where a child shares occupation of the property and simply receives a share of the property from which they also benefit. Neither will they apply where a parent pays their non-occupying child a market rent for occupying the share of the property which they have given away. However, needless to say, many parents will not be in favour of this approach.
Parents who are planning to make a gift of a share in the home they share with their child should ensure this is properly documented and implemented carefully to ensure it does not fall foul of the GROB rules. Importantly, should the child move out in the future, the situation would require review to avoid bringing his or her interest in the property back into the IHT net.
Why gifting the family home might not be a good idea?
Whilst gifting a share of the family home is potentially an attractive way of removing value from the parents' estate, it can significantly curtail the ability of the child to move out later. And even though, for many people, tax planning is an essential part of planning for later life, the well-being of parents and adult children is equally, if not more important, particularly at a time when the parents will value comfort and security.
Reducing the IHT bill should, therefore, not be the only motivator for making an early gift of a home. There are potential risks that need to be considered and which often mean that it may not be the best strategy for the parents, or even for the child.
Divorce – this risk is more relevant in certain cultures where multi-generational families living together are more common. It may be tempting to gift a child, and less commonly their spouse, a share of the home in which they are living. However, if their relationship goes wrong and they own part of the family home, this will form part of their assets, as in any financial settlement on divorce or formal separation. At worst, this could mean that the property has to be sold in order to satisfy a possible claim.
Bankruptcy – In the event of a child becoming bankrupt, possibly following a business failure or job loss, if they own a share of the family home, this would be an asset potentially available to creditors. It might be possible to avoid the house being sold while the parents are also living there, but this remains a risk.
Disagreements between parents and children – Disagreements between parents and adult children are not uncommon. Living together may increase the likelihood of issues arising and the adult child deciding to leave the family home. If they also own part of it, and want to realise that share, perhaps to finance their own property purchase, a sale may be the only option to do so.
How can I divide the home between my children?
Where only one child in a family continues to live at home, parents have to decide how to divide their assets after death to be fair to all of their children. For wealthy families, if the parents want to leave the family home to the resident child, they may be able to use other assets to achieve equality between the children.
However, for many people, the family home makes up the biggest share of their estate, possibly almost all of it. If the resident child has already received a share of the family home during the parents' lifetimes, this may be of such a value that it is not possible to ensure equality with the other children after their deaths.
Even where it is possible to divide the property between the children fairly, unless the resident child has sufficient wealth of their own to buy out their siblings, or can raise a mortgage to do so, it may be necessary for the property to be sold for everyone to receive their inheritance. The risk that a child may lose their home as a result of their parents dying is one which often worries parents. Ideally, families need to discuss what will happen in this situation, and the resident child should try to put in place mitigation strategies, which may involve increasing their savings where this is possible, or accepting that they may need to downsize.
As the trend for adult children living at home shows no sign of abating, the question of how or whether to give a resident child an interest in the family home is likely to become more common. The risks involved mean that careful consideration and legal advice are essential before doing anything that could jeopardise the parents' own ability to continue living there.
As always, communication between the whole family, whether they live at home or not, is invaluable to avoid misunderstandings arising, and to help parents decide the best way to be fair to all their children.