Can we transfer our home to our children to reduce IHT?

For example, parents who own their home, mortgage-free, might want to give the property to their children. 

 

Unfortunately, it isn't simply a matter of passing on their property now and living long enough to avoid IHT thanks to the seven-year rule. 

 

Parents’ joint inheritance tax exemption is £1million. This is because each parent has a £325,000 tax-free allowance plus an extra £175,000 if they leave their home to direct descendants. 

 

However, depending on the value of their home and any other assets they hold, their estate could exceed this limit. Assets over £1million attract IHT at 40%. 

 

If you gift your home to your children but still live there you should pay rent at the market rate. If you can afford to pay the rent and live for at least seven years after making the gift it’s an option to reduce IHT. Children will, however, pay income tax on the rent they receive. If you don’t pay rent, your home remains part of your estate. 

 

It’s also significant that, from 2027, the government plans to include unused pension pots for IHT purposes. For many families, this will increase the estate’s tax liability when parents die. 

 

For estates worth over £2million the £175,000 residence nil rate band goes down by £1 for every £2 over the IHT-free £1million limit. This significantly increases IHT for larger estates. 

 

'Downsizing relief' allows parents to benefit from the residence nil rate band, even if they have downsized or sold their home since July 2015. 

 

Parents should ideally consider their options to reduce the eventual IHT bill more widely. 

 

Gifts. You can give unlimited money or assets without IHT implications at the time. The gifts must be outright, so parents can’t continue to use the assets after giving them away. This includes conditions that allow them to take back the asset later. To remain free of IHT parents must live for seven years after making the gift. 

 

Capital Gains Tax. If parents retain the right to reclaim their gift it’s called a 'reservation of benefit'. The assets remain in their estate for IHT purposes, but not for capital gains tax (CGT). 

 

Transferring ownership of the family home can create a CGT liability for children when they sell the property. CGT doesn’t apply at the time of giving but will apply to any increase in value afterwards. This is because the children probably won’t live in the property as their main home. If parents continue to own the property, its increased value, up to their death, is exempt from CGT. 

 

Later life care. If parents ever need long term care, the gift could potentially amount to 'deprivation of assets'. This applies when authorities think someone has deliberately disposed of their assets to reduce their contribution to care home fees. They would then include the value of their home in care fee assessments. 

 

Change of circumstances. Children might divorce or become bankrupt, requiring the sale of their share of the family home as part of their assets. There’s a risk parents could find themselves homeless.