Can I save on IHT if I gift my house to my child?

This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Smith & Pinching in Norwich, Lowestoft and Eaton. The Financial Conduct Authority does not regulate taxation advice, estate planning or inheritance tax planning.

You may have heard that inheritance tax (IHT) is levied on an individual’s estate after death, assuming the assets cross over the tax-free threshold. However, what if you give away certain assets to your children – such as your house? If you no longer own the asset, then is it not correct to assume that you will not pay IHT on it anymore?

The answer is not straightforward and it is important not to make assumptions like this about your estate plan. A mistake could cost your loved ones dearly after your death, possibly undermining their inheritance. Below, our Norwich financial advisers explain how gifting a house to a child can affect your IHT bill. We also offer ideas to help you navigate this issue confidently in 2023-24 when building an estate plan.

If you want to discuss your investment strategy with us, please get in touch to arrange a no-obligation financial consultation:

01603 789966
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Can I give my house to my child?

Yes, you can give your main property to your child whilst you are still alive. But that does not necessarily mean that you should. The most common way is to use a “transfer for nil consideration” (or a “deed of gift”).

Gifting a property is likely to be regarded by HMRC as a “Gift with Reservation of Benefit” (GROB) if you continue to live there. Normally, an outright gift would be classed as a “potentially exempt transfer”. This is relevant to the “7-year rule”, which exempts a gift from IHT if the previous owner survives another 7 years after making the gift.

This means, for instance, that if you gifted a buy to let (BTL) property to your son or daughter and lived for 7 more years, then your estate would not pay IHT on the value of the gift (please note that, if IHT was payable, it would be by the recipient of the gift). If you died within that timeframe, an IHT “taper” rate might apply (e.g. 8% if you die 6 years later, to the amount above the nil rate band.).

If a parent gifts a property to a child, then the latter might need to pay Stamp Duty if they take over some or all of an existing mortgage and the value of the mortgage is over the Stamp Duty threshold. If there is no outstanding mortgage, Stamp Duty is not payable

One possibility is to consider a sharing arrangement where both you and your child co-habit. Here, the partial transfer could be regarded as an outright gift if specific rules are followed very carefully – such as sharing household expenses. Legal advice should be sought here.


Risks to consider

You and your children may have a good relationship right now. However, you do not know how circumstances might change in the future. Various scenarios need to be weighed carefully before any ownership transfer takes place (after seeking professional guidance).

One scenario is that your child gets divorced and the property gets involved with the divorce settlement. The former spouse/civil partner might be entitled to a half share. Another potential scenario is that your child goes bankrupt and needs to sell the property to settle various debts.

There is the possibility that you and your child fall out and the latter kicks you out (which they would be legally entitled to do, if the property is in their name). Another outcome is that you outlive your child and the property passes down to their beneficiaries, who may not accommodate you anymore.


Building a robust estate plan

Many people are understandably anxious to avoid needless IHT and keep more wealth within the family. Yet it is important to not rush to “solutions” which seem to offer a simple, easy answer. There may be other, better options to help you achieve your financial planning goals.

For instance, there is the Nil Rate Band (NRB) which allows an individual to pass down up to £325,000 to beneficiaries without IHT. There is also the Residence Nil Rate Band (RNRB) which “extends” your IHT-free allowance by up to £175,000 provided your main home is left to “direct descendants” (e.g. children).

Therefore, if your total estate is valued at under £500,000 when you die, then your estate may not need to pay IHT at all. Married couples and civil partners can also pass unused IHT allowance to their surviving spouse or partner upon death. In 2023-24, this can conceivably result in a couple having a £1m IHT-free estate to pass down to their children.

A financial planner can help you assess your situation and goals in light of these IHT rules and others. For instance, perhaps a life insurance policy (written inside an appropriate trust structure) could provide a lump sum to cover a future IHT bill.


Conclusion & invitation

For some people, gifting the main home to children can make a lot of sense. Yet it requires careful planning and, ideally, professional advice should be sought.

If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:

01603 789966
[email protected]