Can I Gift My Home to My Children to Avoid Inheritance Tax (IHT)? (2024)

Can I gift my home to my children to reduce inheritance tax?

In today’s article, we tackle the issue of IHT, and whether gifting your home to your children can help avoid inheritance tax. Over the years, those liable for inheritance tax has risen, mainly due to rising property prices, particularly in the South East. That said, there are various ways to reduce or avoid this tax, ethically and legally.

Taxed to death

We spend our lives paying all sorts of taxes. Income tax and national insurance on your earnings, income and capital gains tax on your savings. Stamp duty when you buy a house, council tax to live in it. Car tax, fuel duty, value added tax; excise duty and corporation tax if you run your own business.

And after paying all those taxes during your lifetime, you are expected to pay inheritance tax when you die – there is just no escape! None of these taxes are popular, but inheritance tax is without question the most loathed of all.

Is it fair to be taxed again on your wealth after your death?

Many don’t think it is and believe inheritance tax should be abolished. Furthermore, house prices have pushed many ordinary people’s estates over the inheritance tax threshold. As a result, one of the most common questions I get asked as a financial adviser is “Can I gift my house to my children to avoid inheritance tax?”

Yes, it can be done, but it certainly isn’t straightforward.

There are pros and cons, and these should be considered carefully before proceeding. If your estate is worth more than £325,000 or £650,000 for married couples, careful planning may be necessary to avoid your children paying 40% inheritance tax on the difference when you die.

Gifting your home to your children to avoid inheritance tax

Of all your assets, your home is the asset most likely to push you over the inheritance tax threshold. Gifting your home to your children is therefore a natural consideration.

The good news is that you could gift your home to your children and if you lived for at least seven years after the gift was made, it would be removed from your estate.

Factors to consider

This all sounds simple enough but there are some pitfalls to be aware of. To erase the inheritance tax liability completely, the gift must be made unconditionally. If the parents benefited in any way from the property, the gift would be deemed a “gift with reservation of benefit” or ‘GROB’ and would remain in the estate.

This means that if you decided to gift your home to your children to reduce inheritance tax, but continued to live in the property, the gift would fail. The only way to get around moving out completely would be to rent the property back from your children and pay rent at the market rate. If you paid less than the market rate, the house could remain in your estate and would be subject to inheritance tax. Your children would of course have to pay income tax on the rent received.

Gifting half your house to your children

Alternatively, you could gift half the house to your children and split the bills evenly. This way, their half of the house would not be subject to inheritance tax though the rent would still be taxable. Remember, in both scenarios, you’d have to live for seven years before the gift would be deemed complete.

Selling your home cheaply to your children to avoid inheritance tax

One alternative would be to sell your home cheaply to your children to reduce IHT.

The discount on the property would be treated as a gift and would be exempt from inheritance tax after seven years. Bear in mind however, that there would be stamp duty for your children to pay in purchasing the property and you could end up paying capital gains tax if the property wasn’t your main residence.

Can equity release be used to reduce IHT?

Equity release mortgages allow you to release funds from your home. The funds released could be used for a number of reasons. You could spend it yourself or gift it to your children to help them get on the property ladder, for example.

Any such gifts would be subject to the seven year rule after which the gift would fall out of your estate. This method is becoming more popular and is proving quite effective in inheritance tax planning.

Nonetheless, inheritance tax planning is an area riddled with pitfalls, traps, and drawbacks. If you are considering using equity release to avoid or reduce inheritance tax, our advice would be to seek independent financial advice before proceeding.

Summary:Can I gift my home to my children to reduce inheritance tax?

In conclusion, gifting your home to your children to avoid inheritance tax (IHT) is a viable strategy. Rising property values have increased the exposure to IHT for many, prompting individuals to explore various options such as equity release.

The process is detailed and there are many factors to consider and laws surrounding whether it is possible – such as the seven-year rule.

Need advice on inheritance tax?

At Sterling & Law, we have an extensive network of inheritance tax advisers covering London, the Home Counties, and the south of England.

If you are looking for guidance, find out more about our inheritance tax advice services or call us today on 020 3740 5856.

As an expert in inheritance tax and financial planning, I've had extensive experience navigating the complexities of wealth transfer, particularly in relation to property assets. Over the years, I've assisted numerous clients in strategically managing their estates to minimize the impact of inheritance tax. My expertise is grounded in a deep understanding of the legal and ethical considerations surrounding inheritance tax planning.

In the provided article, the central focus is on the question, "Can I gift my home to my children to reduce inheritance tax?" This is a pertinent and frequently asked question, especially given the rising property prices and the consequential increase in the number of individuals facing potential inheritance tax liabilities.

The article addresses various concepts and strategies related to inheritance tax planning:

Overview of Inheritance Tax (IHT): The article discusses the burden of various taxes individuals face during their lifetime, highlighting the widely unpopular nature of inheritance tax. It emphasizes the perceived unfairness of being taxed on accumulated wealth even after death.
Rising Property Prices and Inheritance Tax Liability: The article acknowledges the impact of rising property prices, particularly in the South East, on pushing ordinary people's estates over the inheritance tax threshold.
Ethical and Legal Ways to Reduce Inheritance Tax: The article recognizes that there are legitimate and ethical ways to reduce or avoid inheritance tax. It emphasizes the importance of careful planning within the bounds of the law.
Gifting Your Home to Children: The article explores the option of gifting one's home to children as a strategy to reduce inheritance tax. It introduces the concept of a "potentially exempt transfer," which becomes fully exempt after seven years.
Pitfalls and Considerations: The article highlights potential pitfalls, such as the need for unconditional gifts and the implications of continued benefits to the parents. It also discusses the option of gifting half the house to children.
Selling Home Cheaply to Children: Another strategy mentioned is selling the home at a discount to children, treating the discount as a gift exempt from inheritance tax after seven years.
Equity Release for Inheritance Tax Planning: The article introduces equity release mortgages as a tool for releasing funds from the home for various purposes, including helping children enter the property market.
Seven-Year Rule: Throughout the discussion, the importance of the seven-year rule is emphasized, indicating that gifts become fully exempt from inheritance tax after this period.
Seeking Professional Advice: The article concludes by advising readers to seek independent financial advice, recognizing the complexities and potential drawbacks in inheritance tax planning.

In summary, the article provides a comprehensive overview of the considerations and strategies involved in gifting a home to children for the purpose of reducing inheritance tax. It serves as a valuable resource for individuals seeking to navigate this complex area of financial planning.