A rising number of families are facing Inheritance Tax bills amid increasing asset values, frozen allowances and tighter reliefs. Understandably, there is growing interest in what steps can be taken to reduce the taxman’s take, including whether or not to pass on your home early.
Inheritance Tax (IHT) is a tax on the property, money and possessions of a person who has died. The standard IHT rate is 40% and is charged only on the part of your estate above the threshold. Usually, there is no need to pay IHT if the value of your estate falls below the nil-rate band threshold of £325,000 or everything above that amount is left to a spouse, civil partner, charity or amateur sports club. Giving your home away to your children or grandchildren can increase the threshold to £500,000.
If you give your home away before you die, then there is usually no IHT payable as long as you move out and live for another seven years. But a majority of finance experts told the Express they would urge readers to be cautious.
Daniel Hobbs, CEO at New Leaf Distribution, said that giving away the house while continuing to live in it sounds like a clever tax wheeze, but unfortunately HM Revenue & Customs has heard of it too. He added: “The gift-with-reservation rules can keep the property inside your estate for Inheritance Tax purposes, so simply putting the children’s names on the house isn’t the magic trick people sometimes imagine.
“There can be perfectly legitimate reasons to pass wealth to children during your lifetime, but don’t give away your financial security just to win an argument with the taxman. Tax planning should make the family better off, not leave mum and dad living in a house they no longer own.”
Under current IHT rules, people who want to continue living in a property after it is given away must pay the new owner the going rent, as well as the bills. Without doing so, the move counts as a “gift with reservation”, which gets added to your estate when you die.
However, if you only give away part of your property and the new owners live there, you do not have to pay them rent. Be warned, though, that if you die within seven years of passing on all or part of your house, it will be considered a gift and tax can be due.
Nouran Moustafa from Roxton Wealth said giving your house to your children early to avoid IHT sounds clever until you realise you could be giving away your financial security along with the keys. She added: “The seven-year rule isn’t a magic escape route. If you gift your home but continue living there rent-free, HMRC can still treat it as part of your estate.
“Tax isn’t even my biggest concern. What happens if your child divorces, goes bankrupt or the relationship breaks down? You’ve potentially put your own home at risk.”
Ms Moustafa said early gifting can make sense for families with substantial estates, sufficient assets elsewhere, and no future need for the property, but it requires proper legal and tax planning. She asked: “My advice? Never make yourself financially vulnerable to make HMRC slightly poorer.”
Samuel Mather-Holgate from Mather and Murray Financial said signing your house over to your children could also open a can of worms when it comes to care fees.
He said: “If avoiding care costs was a significant reason for the transfer, your local authority could treat it as deliberate deprivation of assets and assess you as though you still owned the property.”
Mr Mather-Holgate said gifting early can work if you genuinely surrender the property, survive seven years and have no further need for it.
The expert cautioned: “But you also risk losing control of your home, with potential tax complications and exposure to your children’s divorce or financial difficulties. Poor advice is worse than no advice. Get proper professional guidance before signing away your biggest asset.”
Tony Redondo from Cosmos Currency Exchange said gifting property early to beat IHT is a common but risk-laden strategy. He added: “The upside: it starts the seven-year Potentially Exempt Transfer clock, and if you survive it, the asset leaves your estate, and its future growth is frozen outside it.
“The traps are nasty. Keep living there without paying full market rent and HMRC’s Gift with Reservation of Benefit rules leave the property in your estate anyway. Pay rent and your children face tax on that income. Hand over the deeds and you hand over control, and a divorce, bankruptcy or creditor on their side puts your home at risk. Gift a second property and Capital Gains Tax bites immediately.
“It only works if you move out completely, share the home genuinely or pay documented market rent. For most people, the combined nil-rate bands, £1million for couples, are far safer.”
David Stirling, Independent Financial Adviser at Mint Wealth, said: “I’d be very cautious about giving a home to children purely to avoid Inheritance Tax. It can work in the right circumstances, but only where the parents genuinely don’t need the property or the capital and understand they are giving up control.
“If you still think of it as your house, that’s probably a good sign you shouldn’t be giving it away.”
