Gifting property to children or family members during your lifetime is not only incredibly generous, it can also help reduce inheritance tax liabilities. However, the rules and calculations can be complex – and there are potential pitfalls that could trip you up if you don’t seek expert guidance.

What is Inheritance Tax?

Your estate, which includes property, savings and possessions, can be taxed at a maximum rate of 40% when you die. This tax is known as Inheritance Tax, or IHT.

But IHT is only payable if your estate is valued above a certain threshold. This threshold, known as the nil-rate band, is set at £325,000 (tax year 2023/24), and is predicted to remain at this level until at least 2028.

If your children or grandchildren inherit the property when you die, you get an extra £175,000 added to this tax-free figure. This means your tax-free threshold could be £500,000 or £1m in total for a married couple, since the tax-free allowances of a deceased spouse can be transferred to the surviving spouse. These rules apply provided the value of your estate is under £2 million.

It’s different if you pass your estate to a spouse, civil partner or a charity, as no IHT will be due.

If your children or grandchildren inherit your property, an extra £175,000 added to your IHT nil-rate band

Answers to the questions our advisers are regularly asked

Gifting your home while you are alive means there will be no IHT payable – as long as you move out or pay market rent to your children (or the gift recipient), and (importantly) live for seven years after the handover.

1. What’s the seven-year ‘inheritance’ rule?

While you do have a tax-free gifting allowance every year, the value of a property will far exceed those limits. Any gift above those annual gifting allowances is therefore considered a “potentially exempt transfer” – meaning it has the potential to be tax-free provided you live for a further seven years.

However, if you were to pass away within seven years, the property will become a “chargeable transfer” and is added to the value of your estate for IHT purposes. As we mentioned before, there is no IHT to pay on an estate up to the value of £325,000, with an extra £175,000 when you leave your home to your children or grandchildren (married couples will benefit from these allowances twice, as each spouse can transfer their allowance to the other upon death).

Anything above this amount could be subject to the full 40% inheritance tax rate, which will apply if you die during the first three years after the transfer of equity. After that, the IHT rate then drops on a sliding scale, year by year, until the seven years have passed.

2. Can I still live on the property once it's been transferred to my children?

If you gift the property and continue living there, you will have to pay market rent to your children (or other giftee) if you want it to sit outside your estate for inheritance tax purposes. Paying rent below the market rate, or none at all, means the house will still be considered part of your estate, and your loved ones could be hit with a hefty IHT bill when you die.

“Deliberate deprivation of assets” means the local authority could claim care costs from the person your assets were transferred to

3. Can I gift part of my property when my children still live there?

If you live in the house together with those you wish to gift it to (let’s assume it’s your children), you can gift just part of it to them. Their portion would be disregarded in the valuation of your estate, subject to the seven-year rule. But be aware that if you outlive them, their part of the house might end up being inherited by their beneficiaries.

4. Do you still have a mortgage on the property?

If you still have a mortgage on the property, your children (or other giftee) will be required to pay stamp duty for the value of the outstanding loan. Also, if they don’t meet the lender’s affordability check, the lender might not agree to transfer the loan into their name. If this is the case, you could think about acting as a guarantor on the mortgage.

5. Do I need to pay Capital Gains Tax (CGT)?

If you gift your property to your son or daughter, you won’t need to pay CGT as long as the house was your main residence for the whole time you owned it. However, if you are gifting or transferring a second home, you will be liable to pay CGT if the property is worth more than when you bought it, and that increase is above the CGT threshold (£6,000 for tax year 2023/24).

Basic-rate taxpayers pay CGT at a rate of 18% for gains on rental property, and higher-rate taxpayers pay 28%. Depending on the value of your estate when you die, paying CGT now could still be cheaper than the potential inheritance tax bill, provided you live for another seven years to escape inheritance tax on it altogether.

6. Will I avoid paying for care by gifting my home?

If you’re thinking of gifting your property to avoid paying for care when you’re older, be careful. Your local authority might regard such a move as a “deliberate deprivation of assets”, and they’ll have the power to claim care costs from the person that the assets were transferred to.

Why it's essential to seek professional advice

The rules relating to tax are complex, subject to individual circumstances, and are subject to change at any time. So, if you’re considering gifting your property, it’s essential to consult a professional adviser.

It’s not just inheritance tax you need to consider; you could also be hit with an unexpected capital gains tax or stamp duty bill. And if you suddenly need later-life care, without careful planning, your children might end up having to fund it.

Amber River’s independent financial planners will look at your specific circumstances, take all of the necessary details into account, and create an IHT planning strategy that protects you and your loved ones.

Get in touch

To speak to us about your investment goals, or to arrange an appointment, call 0800 915 0000, or alternatively use our contact form here.

Capital Gains Tax Estate planning Gifting IHT Inheritance Tax Planning