Can I put my house in my children’s name to avoid 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 have risen, mainly due to increasing property prices, particularly in the South East. That said, there are various ways to reduce or avoid this tax, ethically and legally.
Key article takeaways
- Gifting your home to your children can help reduce inheritance tax, but careful planning is required
- The seven-year rule applies – if you live for seven years after gifting, the house is exempt from inheritance tax
- Continuing to live in a gifted home without paying rent can invalidate the tax benefit
- To fully avoid inheritance tax, the gift of your home must be ‘unconditional’
- Selling a property at a discount to your children is an option but may involve stamp duty and capital gains tax
- Renting your home back from your children at market rates can allow you to continue living there while still incurring tax benefits
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 inheritance tax fair?
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 can gift your home to your children. If you live for at least seven years after the gift is made, it will be removed from your estate.
Therefore, no inheritance tax would be due. This arrangement is called a potentially exempt transfer and becomes a fully exempt transfer after seven years. If you are unsure if your estate is liable for this levy, try our inheritance tax calculator
The seven-year rule explained
You may have noticed in the previous section, mention that if you live for at least seven years after the gift is made, it will be removed from your estate. This is called the seven-year rule.
So, what is the seven-year rule for inheritance tax? Here is a quick overview:
- If you give away your home and live for seven years, it won’t be taxed when you pass away
- Should you die within seven years, the gift may still be taxed
- After three years, the amount of tax starts to reduce each year, thanks to taper relief
- Taper relief only applies if the total gifts exceed £325,000
- The tax is reduced by 20% after three years, and less each year until it reaches zero after seven years
Related reading
- 10 effective ways to avoid inheritance tax in the UK
- Wealth preservation: Seven ways to preserve your wealth, assets & property
Factors to consider when gifting property to children
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
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.
Summary: Can I gift my home to my children to avoid 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?
Sterling & Law has 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 or call us today on 020 3740 5856.
Article FAQs
To learn more about gifting property to children to avoid inheritance tax, have a read of this selection of FAQs to broaden your understanding.
Can I continue to live in my home after gifting it to my children?
Yes, but if you stay in your home without paying rent at market rates, the gift is considered part of your estate for inheritance tax purposes. For example, if you gift the house but live rent-free, the taxman could still count it towards inheritance tax.
What happens if I gift my home and then move into care?
If you gift your home and move into care within seven years, the property may still be part of your estate for inheritance tax. However, if you survive the seven years after gifting, the house is not counted, even if you’re in care.
How much can I gift without paying inheritance tax?
You can gift up to £325,000 over your lifetime without paying inheritance tax. This is the nil-rate band. Anything above this could be taxed if you pass away within seven years. For example, gifting a property worth £400,000 may result in tax on the amount over £325,000.
Are there any exemptions from inheritance tax for passing on property?
Yes, you can pass your main home to children or grandchildren with an additional inheritance tax exemption called the main residence nil-rate band. This gives you up to an extra £175,000 on top of the standard £325,000 allowance, helping reduce the tax due on your home.
What is the impact of giving away property on my financial security?
Once you gift your home, it no longer legally belongs to you. This means you can’t sell it or use it for financial support. For example, if you later need money for care, you won’t have access to your property’s value. It’s vital to plan ahead.
Do gifts to family members other than children also qualify for the seven-year rule?
Yes, the seven-year rule applies to gifts given to anyone, not just your children. Whether you’re giving your property to a sibling, a friend, or another relative, the same rule means no inheritance tax applies if you live for seven years after the gift.
What happens if I pass away within seven years?
If you die within seven years of gifting your property, inheritance tax may still be due. The closer to seven years you get, the less tax your family will pay, thanks to taper relief. For instance, passing away after six years would reduce the tax significantly.
How does gifting property affect capital gains tax?
Gifting your main home usually doesn’t trigger capital gains tax, but if it’s a second home or investment property, you may need to pay. For example, if the property’s value has increased since you bought it, you might owe tax on the gains when you gift it.
What legal documents or steps are needed to gift property correctly?
You’ll need a solicitor to handle the legal transfer of the property, ensuring it’s done properly. The process usually involves a deed of gift or formal property transfer documents. It’s important to have everything documented correctly to avoid any future disputes or tax issues.
External resources
Here is a selection of other articles from reputable sites that cover this topic:
- Gifts and exemptions from Inheritance Tax (MoneyHelper)
- How to gift property to children tax-efficiently (Investors Chronicle)
- Can I give my home to my children? (Zoopla)
- Inheritance tax planning and tax-free gifts (Which?)
