Can I give my house to my children to avoid inheritance tax?

Inheritance tax (IHT) is the tax applied to your estate when you pass away. Your estate includes everything you own: your property, savings, and possessions. If the value of your estate exceeds certain thresholds, your beneficiaries may need to pay up to 40% of the excess amount in taxes.

• Nil-rate band:
  This is the threshold up to which your estate will be exempt from tax. Currently, the nil-rate band is set at £325,000 per person for the tax year 2024/25, meaning you’d only be taxed on the part of the estate that exceeds that amount. The 2024 Autumn Budget confirmed it will remain frozen until at least 2030.

• Residence nil-rate band:
  If your estate includes your primary residence, and you plan to give your house to your children or grandchildren, an additional £175,000 tax-free allowance applies. This increases the total tax-free threshold to £500,000 for a single person.

• Married or civil partner exemption:
  Being married or in a civil partnership offers significant advantages. You can transfer assets, including property, to your spouse or partner, tax-free. Additionally, your allowances combine, allowing you to potentially pass on up to £1 million tax-free to your children or grandchildren.

Gifting your home to your children during your lifetime can reduce inheritance tax liability, but it’s not always straightforward. Below are key points to consider.

You have a single tax-free gift allowance of £3,000 every year, plus various other allowances that are exempt from IHT. However, the value of a property will far exceed these tax-free allowances.

You can still give away higher value gifts in the form or assets, money or property, but these are classified as a “potentially exempt transfer.” This means that if you live for seven years after transferring ownership, the property will no longer be included in your estate for IHT calculations.

However, if you pass away within those seven years, the property will be taxed on a sliding scale.

If you plan to give your house to your children or grandchildren, early planning is crucial to take full advantage of the seven-year rule.

Here’s where things get tricky. If you give your house to your child but continue living in it, it may still be considered part of your estate. To avoid this, you need to pay market rent to the new owner – your son or daughter – while living in the house.

If you don’t, it means you’re retaining a ‘reservation of benefit’, and under HMRC rules, this means the house is still considered part of your estate for inheritance tax purposes, even though you’ve legally gifted it.

If you’re not ready to give up full ownership of your home, you might consider gifting only a portion of the property while keeping the rest under your name. This is known as a shared ownership agreement.

However, there are tax implications to this arrangement. The portion you retain will remain part of your estate, and your children’s share may still be subject to inheritance tax if you pass away within seven years.

And if your child were to unfortunately pass away before you, their part of the house might end up being inherited by their beneficiaries – which could make things awkward, especially if you still live there.

If the property you want to gift has an outstanding mortgage, the process becomes more complex. Your children will need to pass the lender’s affordability checks before they can take on the mortgage. Additionally, stamp duty may apply, based on the value of the outstanding loan.

You could step in and act as a guarantor for your child, which might help facilitate the mortgage transfer if there was an affordability problem. But this could make you liable in the event your children were unable to pay.

If the property you’re gifting is your primary residence, capital gains tax (CGT) typically won’t apply. However, gifting a second home or an investment property is a different story. If the property’s value has increased significantly, you could be liable for CGT on the gain.

For residential properties, CGT is charged at a rate of up to 24%. While paying CGT might seem like a burden, it could be less costly than the inheritance tax your children might face if the property remains in your estate.

You also need to bear in mind that the Residence nil-rate band of £175,000 only applies to the main residence, not second properties.

Some people think that gifting their home is a way to avoid using its value to fund care costs in later life.

Be warned: local authorities have strict rules to prevent this. If they suspect you’ve deliberately deprived yourself of assets to avoid care fees, they can claim the costs from the person who received the gift – in this case, your children.

The process of transferring ownership of your home involves several steps:

1. Deed of Gift or Transfer of Equity: These legal documents formally change the property’s ownership.
2. Land registry update: The new owner’s details must be recorded with the Land Registry.
3. Professional advice: A solicitor can guide you through the paperwork and ensure compliance with tax laws.

Life circumstances can change, and you might find yourself in a situation where you want or need to regain ownership of the property. Reversing a property gift is possible but can be complicated.

It may involve legal fees and tax consequences, particularly if your child has already made financial decisions based on their ownership.

If your child faces financial struggles, such as bankruptcy or divorce, the gifted property could become part of their assets that creditors or ex-spouses could claim.

This can lead to family disputes and the possible loss of the home. Proper legal protections, such as trusts, can help mitigate these risks.

There are alternatives, such as setting up a trust and transferring ownership of your home into it. Trusts can provide tax advantages and protect the property from external claims. But these arrangements can be expensive to set up and maintain, and you may end up with limited control over the property.

Gifting a property outright during your lifetime versus leaving it in your will both have pros and cons. While gifting can reduce inheritance tax liability, including the property in your will may give you more control over the asset for the rest of your life.

Key considerations are:

• If you need care later in life, the value of the home could still be assessed.
• Family disputes could arise if ownership is unclear or contested.
• Your children might face financial liabilities, such as stamp duty, mortgage payments, or an unexpected tax bill if you were to die within seven years

Tax and estate planning can be complex and depend on your personal circumstances. Rules also change, so expert guidance is important.

Amber River’s financial planners take a big-picture view of your finances. While we don’t create legal documents like wills or trusts, we often work with your solicitor or accountant to ensure your estate planning is thorough and effective. Together, we help protect your wealth and your family’s future.

To speak to one of our financial planners about gifting a property to your children, or for advice on inheritance tax planning, call 0800 915 0000, or alternatively use our contact form to arrange an appointment.