Can you avoid Inheritance tax (IHT) on your death by gifting your home to your children now?

IHT is calculated primarily using the value of your estate that passes on your death.  A person’s estate has an IHT exemption of £325,000, known as the Nil Rate Band (NRB), that can pass free of IHT. For couples in a marriage or civil partnership, they have between them £650,000 that can pass free of IHT because if, on the death of the first person, part or all of the NRB is not used, this can be transferred and is available on the second death. For unmarried couples, find out how inheritance rights work here. IHT is charged at 40% on the value of the estate over the available IHT exemptions.

Gifting in lifetime is hence seen as a way of IHT planning by way of reducing the value of your estate that passes on your death.

If you gift in your lifetime you will need to survive that gift by seven years, or the gift will be added back to your estate value on death for the purposes of calculating IHT. Only if the gifting is over the available NRB will there be a tapering of IHT between 4-7 years from the date of the gift.

There are some allowances to this:

1. £5,000 if they are a parent of one party to the marriage or civil partnership,
2. £2,500 if they are either a remoter ancestor than a parent of a party to the marriage or civil partnership, or are one of the parties to the intended marriage or civil partnership,
3. £1,000 in any other case

On the face of it gifting your home in your lifetime would for most people significantly reduce the value of their estate for IHT purposes – BUT it depends if you will still be using your home.

It is a requirement of lifetime gifting that the gift has left your possession entirely. If you retain any benefit from it then the seven-year rules do not start, although legally the gift will have been made. E.g. you gift a painting to a relative, but you still keep the painting in your own home, then you have retained a benefit. The full value of the painting will be included in your estate upon death although legally it will belong to the relative.

The same applies if you gift your home, but still live in it, either permanently or even continue to use it whenever you wish to stay. This means there would be no IHT saving. Read more about why you should sometimes be wary of inheritance tax gifting here.

Further as the gift is legal when the relative decides at some point in the future to sell it, there may be Capital Gains Tax, and the gain is calculated from the date if was gifted. But if it was inherited any gain would only be calculated from the date of death. Worst case scenario could therefore be your relatives paying not only IHT on your death for this property at 40%, but also a Capital Gains Tax liability too on the gain.

Please note that if you gift an asset and do not reserve a benefit for a period, but this later changes, then the seven-year rule stops applying during the period you start benefitting, and starts anew if you later stop benefitting again.

Some considerations are:

1. Gift your property but thereafter pay market rent for your usage. This prevents it being a GROB, so the seven-year rule can commence at the date of the gift.
2. If any of your children still live in the property with you, gift them a share of the property only, while you retain the share that you still benefit from e.g. one child lives with you and you gift 50%, then you each contribute 50% to the outgoings.
3. If you gift to a child who resides with you, then under current Capital Gains Tax rules, they will have the exemption of this being their principal residence for Capital Gains Tax purposes, if they still reside in the property at the date of your death.
4. Consider carefully if you can afford to gift your house without reserving a benefit, or if there may be some more limited gifting that is more affordable to you, your estate, your lifestyle, and your family.

A solicitor can help you consider how to IHT plan best for your estate and your family. Contact the solicitors in our Private Client team for expert advice on all aspects of IHT planning.